Final 11
Your client purchased a variable life insurance policy more than 15 years ago. The client died several weeks ago. Her son and beneficiary, Rich, comes to see you about the policy. The client had not taken any distributions from the policy and the premium payments are current. As both the executor of his mother's estate and beneficiary of the variable life policy, Rich asks you about the income tax treatment for the death benefit of the policy and about the amount of the death benefit on the account. You should tell Rich all of the following EXCEPT: A. "The death benefit paid to a beneficiary is taxable income for the beneficiary" B. "For policies kept in force until the policyholder's death, the investment earnings in the separate account are not taxed as income" C. "The full amount of the proceeds is included in the insured's estate for federal estate tax purposes" D. "Assessment of federal estate tax depends on the size of the estate"
A. "The death benefit paid to a beneficiary is taxable income for the beneficiary" A death benefit paid to a beneficiary is not taxable income to the beneficiary. However, the amount of the death benefit proceeds are included in the insured person's estate, and are subject to federal estate tax (this assumes that the insured person is the owner of the policy). If the policy is in force when the policyholder dies, investment earnings are not subject to income tax, either to the estate or the beneficiary. This is a major benefit of life insurance. Finally, estate taxes are based on the dollar value of the estate (and remember that the insurance proceeds are included in the estate). There is an exclusion amount and then any estate value above this is taxable.
Which of the following accounts is most similar to a discretionary account? A. An omnibus account B. A margin account C. An open account D. A trust account
A. An omnibus account An omnibus account is an account managed by an investment adviser for different customers, and the customers give the adviser discretionary authority to make trades in their accounts. The adviser buys and sells for the different customers in these accounts grouped as an omnibus account.
A retirement plan that complies with ERISA provides which of the following benefits? I An employer can deduct contributions II An employee is not subject to income tax on contributions III If contributions were deducted by the employer, the employee is not subject to income tax on distributions IV Plan earnings can be taken from the plan tax-free at any time A. I and II only B. II and III only C. III and IV only D. I, II, III, and IV
A. I and II only By complying with ERISA, an employer can deduct contributions made. An employee is not subject to income tax on contributions made by the employer - the contribution amount is excluded from the employee's taxable income. The employer gets to take a tax deduction for contributions made and when the employee starts receiving distributions at retirement (or before, if a premature distribution is taken), any distribution amount is taxable to the recipient. Plan earnings avoid current taxes until distribution - the earnings build tax-deferred.
Which of the following ways do insurance companies invest the premiums paid for variable annuities? I Direct investment in stocks and bonds II Indirect investment in mutual funds III Direct investment in a general account IV Indirect investment in life insurance contracts A. I and II only B. I and IV only C. II and III only D. II and IV only
A. I and II only Direct investment means that the variable annuity separate account is structured as a management company that makes "direct" investments in common stocks and bonds. Indirect investment means that the variable annuity separate account is structured as a unit investment trust that buys shares of a designated mutual fund. Thus, the separate account is making indirect investments in common stocks and bonds via the purchase of the mutual fund shares.
General obligation bonds can be backed by: I Income taxes II Toll collections III Property taxes IV Rental fees A. I and III B. I and IV C. II and III D. II and IV
A. I and III A G.O. (general obligation) bond of a State has the full faith, credit, and unlimited taxing power of the issuer as its backing. The main sources of taxing power for States are income taxes and sales taxes. The main source of taxing power for political subdivisions (cities, towns, counties) is property taxes. In contrast, pledged revenues from enterprise activities like toll roads, convention centers, airports, etc. is the source of income backing revenue bonds.
Which of the following statements concerning premium corporate bonds are correct? I Bonds sell at a premium when the issuer's credit rating improves II Bonds sell at a premium when the issuer's credit rating worsens III Bonds sell at a premium when interest rates fall IV Bonds sell at a premium when interest rates rise A. I and III only B. I and IV only C. II and III only D. II and IV only
A. I and III only Bonds sell at a premium because the issuer's credit rating has improved or market interest rates have fallen.
Compensation for which of the following persons is NOT paid from the fund's income or assets? A. Sponsor/Distributor B. Investment Adviser C. Custodian Bank D. Transfer Agent
A. Sponsor/Distributor
A working couple has saved $6,000 for college educations for their children, who are 3 and 4 years of age. They would like their children to be able to select private colleges if they wish. They understand that this choice will be very expensive and that they must accept some risk in their investments to achieve this objective. They have no other current savings, but they will be able to contribute $3,000 each year to the college education fund for their children. Which is the most suitable recommendation for this couple? A. XYZ Equity Income Fund B. XYZ Growth Fund C. XYZ Energy Fund D. XYZ High Yield Bond Fund
A. XYZ Equity Income Fund
At the time they are opened, all of the following accounts require additional documentation to open EXCEPT a: A. corporate account B. custodian account C. partnership account D. trust account
A. corporate account
At the time of taking an order to sell securities for a customer, a registered representative must do all of the following EXCEPT: A. obtain agreement of the customer to receive the securities against payment B. note on the order ticket discussion of the location of the securities C. note on the ticket whether the securities are in good deliverable form D. determine that the customer owns the securities
A. obtain agreement of the customer to receive the securities against payment The registered representative must determine that the customer will make delivery of the securities in good transferable form within 3 business days of the execution of a sale order. When selling securities, FINRA requires the registered representative to determine that the location of the securities and the fact that they can be delivered in good form by settlement. This must be documented on the order ticket. Obtaining agreement from the customer to pay upon receipt of securities on settlement is required when a buy order is placed; not when a sell order is placed. Also note that this rule really does not apply to customer orders to redeem mutual fund shares, since there are no physical stock certificates issued. It would apply to sell orders for closed-end fund shares that trade like any other stock. Finally, with a Series #6 license, you cannot accept orders to trade closed-end fund shares (a Series #7 is needed), so why is this asked on the exam??!!
All of the following statements about redemption of units during the accumulation period of a non-qualified variable annuity are correct EXCEPT it: A. will not be taxable on the portion of any withdrawal attributable to premiums paid for the contract B. is subject to First-In-First-Out (FIFO) accounting C. results in ordinary income tax liability to the extent the redemption exceeds cost basis D. may result in a 10% penalty tax if the annuity owner makes a lump sum withdrawal before age 59-1/2.
A. will not be taxable on the portion of any withdrawal attributable to premiums paid for the contract
Kathleen purchased an AAA corporate bond for $1,020 with a nominal rate of 6 percent. Approximately what current yield should she expect to earn? A. 5.00 percent B. 5.88 percent C. 6.00 percent D. 6.10 percent
B. 5.88 percent The client bought this bond at a premium price of $1,020. Because the bond has a 6% coupon, the annual income will be $60 per year. Since Current Yield is Annual Income/Market Price, the current yield is $60/$1020 = 5.88%.
After a registered representative has made a sale of a deferred variable annuity, when must a principal review the transaction? A. Within 3 business days of the signing of the application B. Before the application is transmitted to the insurance company and no later than 7 business days after the customer's signing C. Within 7 business days after the insurance company accepts the application and the premium D. Within 10 business days after the application is accepted by the insurance company and the annuity is delivered to the customer
B. Before the application is transmitted to the insurance company and no later than 7 business days after the customer's signing A principal must review and sign a variable annuity application before it is sent to the insurance company, but no later than 7 business days after the customer signs it. As part of the review, the principal must determine that the representative performed the detailed suitability determination required by FINRA before approving the purchase.
A mutual fund can distribute which of the following to shareholders? A. Gains on appreciated securities that have not yet been sold by the fund B. Gains on appreciated securities that have been sold by the fund C. Losses on depreciated securities that have not yet been sold by the fund D. Losses on depreciated securities that have been sold by the fund
B. Gains on appreciated securities that have been sold by the fund Mutual funds must distribute capital gains on securities that have been sold at a profit. If the appreciated security has not been sold, there is no taxable capital gain - this is called "unrealized appreciation." Regarding capital losses, if a mutual fund has securities that have depreciated in value, there is no capital loss until the security is sold. When the security is sold, the fund will have a capital loss, but this loss cannot be distributed to shareholders. If the fund has other capital gains in that year, it may net the capital loss against the capital gain and distribute the net capital gain to shareholders. If the fund has a net capital loss, this cannot be distributed to shareholders. It would be carried forward by the fund to the next tax year, where it could be netted against any capital gains that the fund realizes in that year, and any net capital gain for that year would be distributed to shareholders.
Which TWO of the following laws are federal acts that regulate mutual funds? I Securities Act of 1933 II ERISA III Blue Sky Laws IV Investment Company Act of 1940 A. I and II only B. I and IV only C. II and III only D. II and IV only
B. I and IV only The Securities Act of 1933 and the Investment Company Act of 1940 are the primary federal laws regulating mutual funds. Each defined type of investment company must register with the SEC under the 1940 Act; and investment company securities offerings are required to be registered with the SEC and sold with a prospectus under the 1933 Act. ERISA (Employee Retirement Income Security Act) is federal legislation regulating retirement plans. Blue Sky laws are state laws regulating securities and the firms and individuals that sell them in the state.
Arrange the following money market interest rates from highest to lowest? I Federal Funds Rate II Call Loan Rate III Prime Rate A. I, II, III B. III, II, I C. II, III, I D. III, I, II
B. III, II, I
A year ago, Calvin bought at par the 6% preferred stock of the Mick's Mousetrap Company. When he needed cash to buy a new car, he considered selling his shares. Upon contacting his broker, Calvin learned that the shares were now selling for $110. What is a likely cause for this change in price? A. Interest rates have risen B. Interest rates have fallen C. Interest rates have been stable D. Interest rates have been fluctuating
B. Interest rates have fallen
Richard, a 40-year-old sales representative, is married with a 12-year-old daughter. His annual household income is $50,000. The family owns their home. He has coverage under Social Security and a 401(k) plan. Richard carries a $70,000 whole-life policy and has $8,000 in a savings account. He has recently inherited $50,000 and wants to invest in an annuity to maximize returns. Which product should his registered representative recommend? A. Single premium immediate annuity B. Single premium deferred annuity C. Fixed annuity D. An annuity is inappropriate for this client
B. Single premium deferred annuity A single premium deferred annuity allows Richard's investment of his $50,000 to start growing immediately, tax-deferred. Because he is only 40, he cannot take an immediate annuity without incurring tax penalties (10% penalty tax for taking retirement funds prior to age 59 1/2). The fixed annuity would not maximize his return since fixed annuities invest primarily in fixed-income securities. To maximize return, variable annuities invested in a growth separate account would be the best recommendation.
A client informs his representative that he just received a trade confirmation. The confirmation shows a security position purchased for a lower price than the actual price of the transaction, which is favorable to the client. Which statement is TRUE? A. The confirmation is binding and final, and the broker-dealer must absorb the cost of the error B. The representative should inform the broker-dealer so that the mistake can be corrected C. The matter must be resolved through binding arbitration D. The matter must be resolved through the Code of Procedure
B. The representative should inform the broker-dealer so that the mistake can be corrected Errors in confirmation are not binding on the firm. The customer pays the correct price of the trade. The firm will send out a corrected confirmation, and this is the price that the customer must pay. It makes no difference if the erroneous reported transaction price (as compared to the actual price of the trade) was favorable or unfavorable to the client.
A 50-year old individual becomes disabled and wishes to withdraw money from his IRA. How will the withdrawal be taxed? A. There will be no tax due B. The withdrawal is subject to income tax only C. The withdrawal is subject to penalty tax only D. The withdrawal is subject to both income tax and a penalty tax for early withdrawal
B. The withdrawal is subject to income tax only If an individual becomes disabled before age 59 1/2, distributions can be taken without penalty tax. However, since income tax has never been paid on the withdrawal, it will still be subject to regular income tax.
All of the following statements concerning redemption and repurchase of mutual fund shares are correct EXCEPT: A. the fund must redeem shares within 7 calendar days unless there is a suspension or restriction of trading on the New York Stock Exchange B. a repurchase agreement provides for payment of a different price for shares than the fund will pay at redemption C. the fund need not require presentation of shares for repurchase D. if an investor requests an underwriter to repurchase, the result will be quicker receipt of funds
B. a repurchase agreement provides for payment of a different price for shares than the fund will pay at redemption Upon presentation of a proper request for redemption, a mutual fund must redeem and make payment within seven calendar days. Suspension or restriction of trading on the New York Stock Exchange other than a holiday or weekend extends this time limit. Generally, there is no requirement to present shares for redemption since records are kept electronically and certificates are no longer issued. When a fund offers a repurchase feature, the fund underwriter agrees that it will repurchase shares from customers at that day's closing net asset value and will wire the proceeds to the customer within one business day. This accelerates the redemption process. The repurchase feature is very attractive to fund investors since they can "cash out" of fund shares more rapidly by having the fund underwriter repurchase their shares than if a redemption is performed with the fund itself. Note that there is no difference in the price received by the customer if the shares are redeemed or repurchased.
An investment adviser wishes to participate in the gains of the accounts that he administers. Under the Investment Advisers Act of 1940, the investment adviser: A. can only enter into advisory contracts with accredited investors as promulgated under Regulation D of the Securities Act of 1933 B. can only enter into advisory contracts with individuals that place at least $1,000,000 under management C. can only enter into advisory contracts with long-established growth mutual funds D. is prohibited from entering into advisory contracts that permit participation in profit and loss
B. can only enter into advisory contracts with individuals that place at least $1,000,000 under management Under the Investment Advisers Act of 1940, investment advisers cannot share in the gain or loss of an account under management unless the customers are limited to individual investors with at least $1,000,000 invested with that adviser or a net worth of at least $2,000,000 ("high net worth individuals"). Regulation D Private Placements (which are not tested, other than being an "incorrect" answer) have minimum net worth standards of $1,000,000 for individuals to be an "accredited investor." Advisers to mutual funds cannot share in gain or loss - no exceptions.
A breakpoint sale is defined under FINRA rules as a purchase of mutual fund shares: A. in an amount sufficient to afford the investor a reduced sales charge B. just below the amount sufficient to afford the investor a reduced sales charge C. under a Letter of Intent D. through automatic reinvestment of dividends
B. just below the amount sufficient to afford the investor a reduced sales charge A breakpoint sale is a sale of fund shares in an amount just below a breakpoint. Such sales violate FINRA Conduct Rules. For example, a customer is sold $9,900 of shares when a breakpoint occurs at $10,000. The customer must be told that if he or she contributes an additional $100, he or she qualifies for a lower sales charge on all deposits.
The Bigger Company established a non-qualified deferred compensation plan for its key executives. All of the following statements about this plan are correct EXCEPT: A. the IRS would tax the employer on any investment income earned on assets acquired to fund this plan B. the plan must be non-discriminatory with respect to both employee participation and employee benefits C. if the employer secures the promise of future benefits by specific assets, the employees will have a current income tax liability D. compared to a qualified plan, the employee has less secure future benefits
B. the plan must be non-discriminatory with respect to both employee participation and employee benefits Employers typically offer a non-qualified retirement plan as a "bonus" to their executives. The amount of retirement benefit for highly compensated executives is limited under a corporation's qualified retirement plan, so additionally offering a non-qualified plan gives the company a way to supplement a highly-compensated executive's retirement income. These are often called "deferred compensation plans." Thus, a non-qualified retirement plan can discriminate as to who will be covered. Contributions to the plan are not deductible to the employer. The employer will have annual taxable income from plan earnings (unless it uses a tax-deferred investment such as a life insurance policy) for the plan. When the employee receives the benefit, such as the deferred compensation, each payment received is taxable to the recipient (and deductible to the employer) at that time. Note that if the plan were to provide security for payment of benefits (meaning that the creditors of the company cannot claim plan assets if the company goes bankrupt, so the employee benefit is "secure"), then the employees will be subject to tax on the benefit. Thus, non-qualified deferred compensation plans give no such security and if the company goes bankrupt, the creditors can claim the plan assets. In contrast, qualified plans provide security for payment of benefits and if the company goes bankrupt, creditors cannot claim qualified plan assets.
John Smith purchases an XYZ Corporate bond for $920 with a nominal rate of 6 percent. John will earn a Current Yield of: A. 5.5 percent B. 5.2 percent C. 6.0 percent D. 6.5 percent
C. 6.0 percent
Which of the following statements concerning a systematic withdrawal plan is TRUE? A. The customer must authorize each sale of shares and payment under the plan B. There is no minimum amount required to establish a systematic withdrawal plan C. A systematic withdrawal plan will be set up in order that there is no danger of exhaustion of principal D. A systematic withdrawal plan provides for payments from fund shares as well as from dividend distributions
C. A systematic withdrawal plan will be set up in order that there is no danger of exhaustion of principal
If a customer fails to pay for a securities purchase, which statement is true? A. No time extension is permitted and the unpaid position must be liquidated immediately B. An automatic extension request can be filed with the Federal Reserve C. An extension can be requested from FINRA only for an extraordinary reason D. An extension request must be directed to the SEC, which has 10 days to make a determination
C. An extension can be requested from FINRA only for an extraordinary reason
Which statements are TRUE? I Premium contributions to non-qualified variable annuity contracts are tax-deductible II Premium contributions to non-qualified variable annuity contracts are not tax-deductible III Premium contributions to variable life insurance contracts are tax-deductible IV Premium contributions to variable life insurance contracts are not tax-deductible A. I and III B. I and IV C. II and III D. II and IV
C. II and III
Terry is a registered representative with Acme Securities, which is registered in all 50 states. Terry has registered in her home state in the Midwest and two adjoining states. She has been a registered representative for several years and has a well-established client list including several high net worth clients. Terry's best client, Mary Smith calls to tell Terry that she has moved to Florida for the winter this year. Mary plans to stay in Florida for five months to enjoy the mild weather. Mary has just received an inheritance from an aunt and she wants to invest $250,000. She asks Terry to research some possible investments and to call her back in a few days. Terry researches suitable investments for Mary and calls her at her winter home to recommend two particularly good choices. Mary authorizes Terry to place the trades. Which of the following is TRUE about this situation? A. Terry can recommend securities because Mary's permanent address is in Terry's home state where Terry is registered B. Terry may make the recommendations because Acme has registered in Florida C. Terry has violated industry rules by soliciting a securities transaction in a state in which she is not registered D. Terry can make the recommendations because Mary is an existing customer
C. Terry has violated industry rules by soliciting a securities transaction in a state in which she is not registered Terry may not solicit securities transactions in any state unless both she and her broker-dealer register there. This prohibition includes existing customers who live part-time in another state.
ZZZ Best offers one of the premier dual purpose funds in the industry today. This fund: A. has growth and value as investment objectives B. allows a new shareholder to select either aggressive or conservative growth as an objective C. issues shares having either a growth objective or an income objective D. issues shares representing a portion of the fund that is either diversified or undiversified
C. issues shares having either a growth objective or an income objective A dual purpose fund allows new customers to select either growth shares or income shares, but not both. Shareholders choosing growth get the capital gain distributions. Shareholders choosing income get the dividend distributions.
A customer comes to you with $60,000 to invest and asks you to split the amount among 3 different Income Funds from different mutual fund sponsors. You should: A. follow the customer's instructions B. inform the customer that allocating all $60,000 to one Income Fund will result in lower sales charges C. mark the order as "unsolicited" D. obtain approval from your principal prior to placing the order
C. mark the order as "unsolicited"
A customer is considering the purchase of $40,000 of ABC Income Fund and intends to use the money within 1 year to make the down payment needed to buy his first house. The fund offers the following share classes: Class A shares: 5% initial sales charge No 12b-1 fees Breakpoint Schedule: $0 - $10,000 5% sales charge $10,001 - $30,000 3% sales charge $30,001 - $50,000 2% sales charge $50,001 - $100,000 1% sales charge Class B shares: No initial sales charge .40% annual 12b-1-fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% redemption fee Redeem within Year 2: 4% redemption fee Redeem within Year 3: 3% redemption fee Redeem within Year 4: 2% redemption fee Redeem within Year 5: 1% redemption fee Redeem after Year 5: 0% redemption fee Class C shares: No initial sales charge .75% annual 12b-1-fee No CDSC The best recommendation for this customer is: A. purchase Class A shares B. purchase Class B shares C. purchase Class C shares D. divide the purchase equally into $20,000 each for Class A, B and C shares
C. purchase Class C shares If this customer invested $40,000 in Class A shares, he pays a 2% sales charge and no annual 12b-1 fees for the 1-year investment time horizon. If the customer invested $40,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 1, he will be hit with a 4% redemption fee on these shares. In addition, the customer must pay .40% in annual 12b-1 fees for 1 year. If the customer invested the $40,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees for just 1 year. The lowest fee purchase is, therefore, Class C shares.
All of the following persons can contribute to a 403(b) plan EXCEPT a: A. professor at a university B. nurse at a hospital C. student at a college D. secretary at a foundation
C. student at a college Non-profit institutions establish 403(b) retirement plans for their employees. Thus, employees of schools, universities, hospitals, and the like are eligible for this type of plan. Students at a college or university are not employees of the institutions and do not qualify.
All of the following would be found on a client's personal balance sheet EXCEPT: A. credit card payables B. individual retirement accounts C. term life insurance coverage D. short term investments
C. term life insurance coverage
The ex-dividend date for open-end investment company shares is: A. two business days after the record date B. four business days before the payment date C. the date designated by the fund board of directors D. the day after the company receives payment of dividends from portfolio securities
C. the date designated by the fund board of directors Because mutual fund shares do not trade, the ex-date is not set by an exchange. Rather, the ex-date for a mutual fund is set by the Board of Directors of the fund. The ex-date for mutual fund shares is the business day following the record date - this is the date the fund actually pays out the distribution. This is the first day that an order placed to buy fund shares will no longer entitle the purchaser to the dividend.
An investor in the 30% tax bracket buys a municipal bond yielding 7%. The equivalent taxable yield for a taxable investment is: A. 2.10% B. 4.90% C. 7.00% D. 10.00%
D. 10.00% This municipal bond yields 7%. To find the equivalent taxable yield, the formula is: Tax-Free Yield / (100% - Tax Bracket Percentage) = 7% / (100% - 30%) = 7% / .7 = 10% Note that the equivalent taxable yield must always be higher than the tax-free municipal yield.
Barring an extension request, under Regulation T, payment for a securities transaction must be received no later than: A. the next business day B. 2 business days after trade date C. 4 business days after trade date D. 5 business days after trade date
D. 5 business days after trade date While it is true that Regulation T of the Federal Reserve Board requires that customers pay for securities purchases "promptly," the payment must be received no later than 5 business days after trade date. If payment is not received on the 5th business day, under extraordinary circumstances, a Reg. T extension may be requested from the exchange where the security trades.
Which of the following items of documentation must a corporation provide when opening a brokerage account? I A copy of the corporate charter II A resolution authorizing opening the account III The corporate seal affixed to the resolution IV The signature of the corporate secretary A. I only B. I & II only C. II & IV only D. I, II, III & IV
D. I, II, III & IV A corporation must provide a copy of its charter and of the corporate resolution that authorizes opening the account. The resolution requires both a signature of the corporate secretary and the corporate seal affixed to it (for those states that still issue corporate seals).
Which of the following statements applies to a combination annuity? I It invests premiums in separate accounts II It invests premiums in the insurer's general account III It offers a hedge against inflation IV It offers a fixed, guaranteed benefit payment A. I and III only B. II and IV only C. III and IV only D. I, II, III and IV
D. I, II, III and IV The premiums for a combination annuity are invested partly in the insurer's general account and partly in separate accounts, so the annuitant receives both a fixed, guaranteed benefit payment and a variable payment that provides a hedge against inflation.
A customer is preparing to annuitize her variable annuity. She asks her registered representative what factors will influence the amount of her monthly payouts. Which of the following should the registered representative's explanation include? I The performance of the separate account II Her gender III The payout option she selects IV Her age when she annuitizes A. I only B. I and II C. III and IV D. I, II, III, IV
D. I, II, III, IV
Which of the following statements concerning the investment portfolio of open-end and closed-end companies are correct? I The investment adviser must buy securities for the portfolio consistent with the fund's investment objectives II The investment objectives can be changed by majority vote of the board of directors III Investors bear the risk that the fund share price will fall below the net asset value of the portfolio IV Investors bear the risk that the value of assets in the portfolio will decline A. I and III only B. I and IV only C. II and III only D. I, II, III, and IV
D. I, II, III, and IV
Which statements are true about retirement plans? I 100% of a distribution from a non-qualified plan represents "pre-tax" dollars II Part of a distribution from a non-qualified plan represents "pre-tax" dollars and part represents "post-tax" dollars III 100% of a distribution from a non-qualified plan is taxable IV Part of the distribution from a non-qualified plan is taxable and part is non-taxable A. I and III B. I and IV C. II and III D. II and IV
D. II and IV A qualified retirement plan is one that "qualifies" for favorable tax treatment under the tax code. Annual contributions to qualified plans are limited in amount and are tax-deductible. Thus, these contributions are made with "pre-tax" dollars. Earnings in the account build tax-deferred. When distributions are taken at retirement age (59 1/2 or later), the entire distribution is taxable, because none of the dollars in the account were ever taxed. A non-qualified retirement plan is one that does not qualify for favorable tax treatment under the tax code. Annual contributions to non-qualified plans are not subject to limitations and are not deductible. Thus, these contributions are made with "post-tax" dollars. Earnings in the account build tax-deferred. When distributions are taken at retirement age (59 1/2 or later), only the portion of the distribution attributable to the "build-up" is taxable (these dollars were never taxed and are "pre-tax" dollars). The portion of the distribution that is attributable to the original investment dollars is a return of capital that is not taxable (since there was no deduction for the investment, these are "post- tax" dollars).
If a customer fails to pay for a securities purchase in the time period specified by Regulation T, an extension request is: I permitted for any reason II permitted only for an exceptional reason III made to the Federal Reserve IV made to FINRA A. I and III B. I and IV C. II and III D. II and IV
D. II and IV Regulation T of the FRB (Federal Reserve Board) allows time extensions for payment to be requested, but only under extraordinary circumstances. The FRB authorizes FINRA to handle the extension requests.
Which choice best describes a 529 Plan? A. Bank deposit covered by FDIC insurance B. Variable annuity subject to NAIC C. Municipal bond fund regulated by the SEC D. Municipal security regulated by the MSRB
D. Municipal security regulated by the MSRB
Which of the following companies could register as a management company under the Investment Company Act of 1940? A. Brown Investments, wholly owned and operated by Michael Brown, with securities valued at $250,000 B. Washington Securities with 246 stockholders and assets valued at $500,000 invested in the following proportions: 20% in commercial real estate, 30% in land, 20% in equipment, and 30% in stocks and bonds C. Harbor Fund with 87 stockholders and assets valued at $775,000 invested in the following proportions: 20% in ships, 40% in common stocks, and 40% in face amount certificates D. Safety Securities with 121 stockholders and assets valued at $150,000 invested equally in ACME Motors common stock and in an office building
D. Safety Securities with 121 stockholders and assets valued at $150,000 invested equally in ACME Motors common stock and in an office building
A married couple, both 52 years of age, have a net worth of $5 million. They have annual incomes of $300,000, and are accumulating adequate retirement benefits through plans at the business they own. Their children are grown, and they have adequate life insurance and emergency funds. They have an investment portfolio with municipal bonds and blue chip stocks. They would like to invest $40,000 in an investment that will have higher returns, and they are willing to take greater risk because they will probably give the money to their children for Christmas presents. Which of the following recommendations is suitable for this couple? A. Large cap value fund B. Asset allocation fund C. High yield bond fund D. Small cap growth fund
D. Small cap growth fund This couple has an investment objective of aggressive growth and they have a high risk tolerance. The only fund that meets this objective and risk tolerance is the small cap growth fund. This fund will invest in companies with small capitalizations and superior growth prospects. These companies involve greater risk, but can provide increased returns to investors.
Which of the following is FALSE about the general standards for communication with the public? A. Public communication must not be misleading or exaggerated B. The standards must follow principles of fair dealing and good faith C. Public communication may not omit material facts D. The standards for advertising and sale literature do not apply to personal appearances to groups of potential investors
D. The standards for advertising and sale literature do not apply to personal appearances to groups of potential investors The standards for advertising and sales literature apply to registered representatives that give speeches about investing to potential customers. The general standards require that public communications must not mislead or exaggerate and must not omit any material facts. Additionally, the general standards require that public communication must follow the principles of fair dealing and good faith.
The financial statements of ACCO Corporate Bond Fund, an income fund, reveal that total net assets increased by 10% this year, when the fund's NAV per share increased by 7%. During this period, the investment adviser to the fund has increased the bond allocation by 6% and reduced the fund's cash holding by 6%. All of the following statements are true about this fund EXCEPT the: A. fund has experienced a net investment inflow for the year as investors purchased more shares B. investment adviser probably expects a stable or growing economy C. investment adviser probably expects a lower amount of net redemptions over the coming months D. expense ratio is likely to increase over the coming months
D. expense ratio is likely to increase over the coming months Because net assets are increasing, and expenses rarely rise at the same rate, it can be expected that the fund's expense ratio (ratio of expenses to total net assets) is likely to decrease over the coming months; not increase. Thus, Choice (D) is incorrect.
All of the following must be registered with the SEC as an investment adviser EXCEPT an adviser to a(n): A. open-end fund B. closed-end fund C. exchange-traded fund D. insurance company general account
D. insurance company general account The Investment Advisers Act of 1940 requires that advisers to investment companies be SEC-registered and regulated; and any adviser that manages $100 million or more of assets must be SEC-registered and regulated. Advisers to insurance companies are not required to be registered (since the insurance company is a sophisticated, institutional investor and an insurance company would not let an adviser charge an excessive fee).
All of the following are functions of the fund sponsor EXCEPT: A. establishing the fund investment objective B. determining if the fund will be diversified or non-diversified C. registering the fund with the SEC D. managing the investments of the fund
D. managing the investments of the fund
If an owner makes a lump-sum withdrawal from a variable annuity during the accumulation phase, all of the following are possible tax consequences EXCEPT if the: A. amount received exceeds the premiums paid, the difference is subject to ordinary income tax B. amount received is less than premiums paid, the loss is deductible against ordinary income C. owner is under 59½ years old, the entire payout is subject to a 10% percent penalty D. owner is under 59½ years old, the amount above the cost basis is subject to a 10% penalty
D. owner is under 59½ years old, the amount above the cost basis is subject to a 10% penalty The owner must include the accumulated dividends and interest earned from investments (the "build-up") as taxable income in the year of surrender only if the amount of the distribution exceeds the cost basis. For example, if $10,000 is contributed and the contract is surrendered when it has a NAV of $15,000, then out of the $15,000 distribution, $5,000 is taxable at ordinary income tax rates (plus a 10% penalty tax if the owner is under age 59 1/2). The remaining $10,000 is a non-taxable return of investment (cost basis). Thus, the entire distribution is not subject to the 10% penalty tax; only the portion of the distribution attributable to the "build-up" is subject to tax. On the other hand, if $10,000 is contributed and the contract is surrendered when it has a NAV of $8,000, then there is a $2,000 loss on the contract. Annuity taxation rules treat this as an ordinary loss, meaning that it can be deducted in full against ordinary income. This is only fair because any gain in the separate account is taxed as ordinary income, not as capital gains.
