Series Exam 6

Bill has a mutual fund with a net asset value totaling $12,000. If he has invested a total of $8,000 with a 7% sales charge and is beginning an 8% annual withdrawal, his first monthly check will be:

$80.00: An 8% annual withdrawal on an initial balance of $12,000 would be $960 ($12,000 x .08). The monthly payment would be found as follows: $960 / 12 = $80. Note that the total investment of $8,000 and the 7% sales charge are smoke—information that is not relevant to the solution of the problem. (84461)

The day of settlement for a U.S. Treasury security is:

1 business day after the trade date: For trades involving U.S. Treasury securities, settlement is one business day after the trade date (T + 1). (33242)

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000?

1,680 shares: To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

An equity security was trading at $100 per share and subsequently fell by 7%. The annual dividend, formerly $4 per share, is decreased to $3.80. The yield on the stock is:

4.1%: The current yield on a stock is found by dividing the annual dividend by the current market price. In this example, the annual dividend is $3.80. This must be divided by the current market price. The question states that the price of $100 fell 7% or $7, making the current market price $93. The current yield for this stock is therefore 4.1% ($3.80 divided by $93). Before the price fell and the dividend was reduced, the current yield was 4% ($4 divided by $100). (84228)

Jonah has recently retired at age 65. He is receiving a large lump-sum retirement payout from his former employer. Although he has only a very small investment portfolio, he has accumulated savings that would cover six months of expenses. Which of the following would be an appropriate allocation of Jonah's lump sum in an investment portfolio if his primary interest is income and his secondary interest is growth for inflation protection?

85% bonds, 15% equities: While a portfolio that consists of 75% equities [choice (d)] might be too volatile for a 65-year-old retiree, 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. Since this investor already has a six-month liquidity cushion in the form of savings, a large additional allocation to cash [as in (a) and (b)] might not provide enough income or inflation protection in the long run. (84609)

A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer needs to preserve the capital since he wants to use the funds to start a new business within the next year. Which of the following funds is the LEAST suitable recommendation for this customer?

A balanced fund: While all of these funds are somewhat conservative, the balanced fund will contain some equity investments and long-term bonds, which will expose the customer to market risk. Given the customer's short-time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed. (72110)

The private meeting between the members on one side of a dispute and the mediator is referred to as:

A caucus: When one of the parties to a dispute meets with the mediator in a separate and private session, it's referred to as a caucus. (18131)

One month after an individual purchased 250 shares of an open-end investment company, there was a long-term capital gain distribution. This payment would be taxable to the individual as:

A long-term capital gain: When a mutual fund makes a capital gain distribution to a shareholder, the shareholder's holding period is determined by the investment company's holding period. The length of time the shareholder held the shares is not relevant. (84692)

An investor choosing to reinvest the distributions received from a mutual fund would do so:

After tax: 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 considered taxable on the investor's tax return for that year. (88091)

Bear Brokerage is acting as the lead underwriter for the IPO of Global Transport Ltd. The new issue is expected to be priced at $22.00. Which of the following statements is TRUE regarding the shares sold to the public?

All underwriters must sell the shares at the public offering price: Under industry rules, syndicate and selling group agreements set the price at which the securities are to be sold to the public, or the formula to determine the price. The agreements must also state to whom and under what circumstances concessions are permitted. An underwriter's sale of a new issue below the public offering price is not permitted. (60730)

The underwriters of the JAK Fund are preparing to file promotional material with FINRA. This material was developed and produced by an independent marketing consultant. All of the following are TRUE regarding this situation, EXCEPT:

Although the underwriter will file the material initially, each dealer who uses it must also file it with FINRA within ten days of first use: Filing of investment company advertisements and sales literature prepared by or for a FINRA member must occur within ten days after initial use. A dealer does not have to file material that has been filed by a sponsor as long as it is used without change. (84169)

Suitability in variable annuity transactions does not apply in which of the following situations?

An employee's contribution to his 403(b) plan: FINRA focuses on the suitability of annuity transactions in the purchase of new contracts, exchanges, and the allocation of funds to the subaccount products within the annuity. Annuity transactions in tax-qualified, employer-sponsored annuity programs (e.g., 403(b) plans) is not subject to FINRA's rules. However, the allocation of funds to the various subaccount products within the qualified plans is covered. (73710)

Exempt securities and offerings are exempt from all of the following, EXCEPT:

Antifraud provisions: Exempt securities and offerings are exempt from all of the provisions of the Securities Act of 1933 with the exception of the antifraud provisions. (33482)

The management fee that a mutual fund pays to its investment adviser is:

Based on the amount of assets under management: The management fee that a mutual fund pays to its investment adviser is based on a percentage of assets under management. By tying the fee to the assets under management, it gives the investment adviser the incentive to manage the fund well and to increase the fund's popularity. (85279)

Decisions of the Board of Arbitration are:

Binding upon all parties to the arbitration: Decisions of the Board of Arbitration are binding upon all parties to the arbitration. The parties agree to accept the findings of the arbitration Board before submitting to arbitration. (73087)

An approach to investing that selects stocks based on a company's financial health, management team, product offerings, and then compares the market price of the stock to the stock of similar companies in order to determine whether the company is undervalued is generally referred to as:

Bottom-up investing: The bottom-up analysis method examines stocks based on a variety of factors, including fiscal health, management team, competitive market position, and current and prospective future product offerings. The market price of the stock is then compared to similar companies to determine whether the company is undervalued in the investors' minds. (33502)

An agent calls a customer to inform her of significant news that will influence the value of security held in her account. Her spouse answers the call and informs the agent that she is traveling and cannot be reached, but the security should be liquidated to prevent a loss. The agent:

Cannot execute the trade without the customer's approval: Only individuals with trading authority can place orders for an account. This question does not indicate that the spouse has trading authority and as a result, the order cannot be accepted. Suitability is not a factor as the agent has not been granted discretionary authority. (88011)

To qualify as a regulated investment company under Subchapter M, an investment company must:

Distribute at least 90% of its net investment income to shareholders: To qualify as a regulated investment company, the company must distribute a minimum of 90% of its net investment income to shareholders. Most investment companies elect to distribute virtually all of their net investment income, since any undistributed portion would be taxable to the investment company.

While opening an account for a new customer, you ask for the customer's occupation. The client declines to provide this information. What course of action should you take?

Document the client's refusal on the account form: Industry rules require that certain items of information, such as name, residence, and whether the customer is of legal age, must be obtained prior to opening a new account. The RR must make a reasonable attempt to obtain certain other information, such as Social Security number and the client's occupation. If the client refuses to supply this second group of information, the broker-dealer may still open the account. However, RRs should document the fact that they have indeed made the effort to obtain the data, such as by writing refused in the appropriate space. Simply leaving the related space on the account form blank is not recommended. (84568)

All of the following funds would have exchange-rate risk, EXCEPT a(n):

Domestic aggressive growth fund: Funds that invest in foreign securities, either stocks or bonds, have exchange-rate or currency risk. This is the risk that the value of income or gains from the security will be adversely affected by changes in the value of the foreign currency. Funds that invest only in domestic (U.S.) securities do not carry this risk for U.S. investors. (84559)

All of the following are typical characteristics of a 401(k) plan, EXCEPT:

Employee contributions are returned tax-free when distributions begin: In a 401(k) plan, an employee can usually make a pretax contribution into the plan and reduce taxable income. Employee contributions are immediately vested. Employers are not required to match contributions although they may do so. However, when the employee begins taking distributions from the plan they are taxed as ordinary income. (85245)

An issuer is attempting to raise additional capital after already issuing securities to the public. This subsequent offering is referred to as a/an:

Follow-on offering: The first time an issuer offers its securities to the public is referred to as an IPO (initial public offering). Don't confuse this with a primary offering, which is still a new public offering, but it's not necessarily the first offering to the public. A follow-on offering is when a company has already gone public and is attempting to raise additional capital with another public offering. A private placement is not a public offering. (33472)

A registered representative is sending an email to banks and investment advisers in anticipation of a new product being offered by the firm. This is defined as a(n):

Institutional communication: FINRA's Communications with the Public Rule defines different types of communication. Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser or investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor. Since the email is being sent only to institutional investors, it is defined as an institutional communication. (73649)

Before recommending an investment only meant for accredited investors broker-dealers must verify a customer meets these standards by:

Making a reasonable effort to ensure the customer is an accredited investor: The SEC suggests methods to determine accredited status which include reviewing a copy of IRS tax forms, obtaining a written statement for the investor's accredited status from a CPA and reviewing bank and brokerage account statements for the prior three months. These are not required methods. The requirement is making a reasonable effort to ensure the customer is an accredited investor. (33430)

The board of directors of a mutual fund would like to change the investment objectives of the fund. This could be done provided that:

More than 50% of the shares voted for the change: A change in the investment objectives of a mutual fund would require more than 50% of the shares to vote for the change. (84330)

A broker-dealer's privacy notice must include all the following information, EXCEPT the:

Names of any other financial institutions with which the firm is affiliated: A privacy notice must include the information contained in all the choices, except the names of other financial institutions with which the firm is affiliated. Only those firms with which information is shared have to be disclosed. (31898)

The use of a prospectus in selling a security relieves a salesperson from the responsibility to disclose to a customer:

Neither (a) nor (b): Sales for new issues of securities may only be solicited through the use of a prospectus. The prospectus will present investors with all of the pertinent facts needed on which to base investment decisions. The use of a prospectus does not relieve a salesperson from disclosing negative aspects about the issue to prospective purchasers. (84851)

May a brokerage firm place a temporary hold on a securities transaction?

No, since this is beyond the scope of SRO rules: FINRA rules permit a brokerage firm to put a temporary hold on the disbursements or transfers of funds and securities, but not on securities transactions. The temporary hold only applies to the account of a specified adult. A specified adult is a person who is age 65 or older or a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders her unable to protect her own interests. (37533)

In order to conduct a securities offering under Rule 147A, which of the following conditions must be satisfied?

Offers may be made in any state, but sales may only take place in one state: Companies that are selling new securities are typically required to register their securities with the SEC. However, under Rule 147 and Rule 147A, if a company is conducting an offering and only selling its securities to its state residents, the offering is exempt from registration. Rule 147A allows for multi-state offers (not sales), which means that issuers are permitted to use general solicitation and publicly available websites to locate potential in-state investors. Although offers are able to be made outside of the state, all sales must still be limited to in-state residents. This differs from Rule 147 which dictates that all offers and sales must be limited to residents of one state. (88493)

In a variable life insurance policy the mortality and expense factors are:

Paid out of the premiums: The mortality, expense, and interest factors determine the amount of the premium. Mortality is the cost associated with the probability of death. Expenses include costs associated with death benefit payments, commissions to salespersons, and various administrative costs. Except in the case of a universal life type of policy, these factors are hidden in the premium and not unbundled. (84732)

A registered representative is taking over the business of another RR who is leaving the firm. Upon examining the accounts, the RR notices that the variable annuities owned by many of the clients 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:

Potentially acceptable if the benefits of the new annuity outweigh the possible taxes and additional sales charges the client might incur: 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. (73980)

If inflation were rising at an above average rate, the type of mutual fund that would typically increase in value is a:

Precious metals fund: Precious metal funds invest in companies that mine gold, platinum, silver, and other precious metals. Historically, hard assets such as the prices of these commodities have responded positively to high levels of inflation, as well as political instability and international tensions. (84517)

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):

Principal: 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. (85567)

A corporation wants to establish a pension plan, but it doesn't want to be obligated to make annual contributions since its revenues are unsteady. A plan that offers flexibility and provides immediate vesting is a:

Profit-sharing plan: A profit sharing plan is suitable for a company that cannot make annual contributions due to the fact that its profitability varies from year to year. Corporations often use a profit-sharing plan to determine the amount they may match in a 401(k) plan. (33495)

According to the Securities Exchange Act of 1934, a person who is on the board of directors of a public corporation and owns 3% of the company stock is:

Required to register as an insider of the corporation: An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation and his immediate family members. Individuals who become insiders are required to report to the SEC within 10 days of becoming insiders. An officer or director is required to register regardless of the number of shares he owns of the public corporation. Insiders are not permitted to make short-swing profits in the stock of the corporation in which they are insiders. If an insider sells the stock at a profit within six months of its acquisition, or sells stock for a profit that was held six months or longer and then repurchases it within six months of the sale, the corporation may sue for recovery of the profit. Insiders are also not permitted to short the stock of the company in which they are shareholders. Insiders are never required to sell shares, but are permitted to buy additional shares as long as it is reported to the SEC. (71511)

An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options MOST likely has an investment objective of:

Speculation: An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options most likely has an investment objective of speculation. (73680)

Interest on U.S. government bonds is:

Subject to federal income tax but exempt from state income tax: Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds where the interest is exempt from federal but subject to state tax. This is based on the doctrine of powers between the federal government and state governments. Each government can tax the interest on its own obligations, but cannot tax the others'. In addition, states usually do not tax the interest received from their obligations owned by residents of that particular state and, in effect, interest is completely tax-free. (84266)

A client's account statement must include all of the following, EXCEPT:

The clients tax ID number: In addition to showing all of the activity for the relevant period, the account statement lists all of the securities that the client owns, debits and credits, cash balances, and the account balance. (88058)

Which of the following statements concerning the review and retention rules for mutual fund retail communications is TRUE?

The communication and a copy of the approval must be kept on file for at least three years: Some examples of retail communications include advertisements, sales literature, Web sites, independently prepared reprints, as well as sales and telemarketing scripts. Retail communications related to mutual funds or variable products must be approved by a principal prior to use and filed with FINRA within 10 business days of first use. A copy of the signed or initialed approval document must be kept on file for a minimum of 3 years from the date of last use. (84923)

A tombstone advertisement for an investment company that's published under SEC Rule 134 may not contain which of the following?

The current yield of the fund: Tombstone ads may not contain performance figures (e.g., the current yield); however, the fund's most recent NAV may be provided. Descriptions of the fund's objectives, investment strategies, and how a prospectus can be obtained are permitted. (33440)

Which of the following statement is FALSE regarding a 482 advertisement for a mutual fund?

The fund's prospectus must accompany or precede the advertisement: The rules regarding 482 advertisements require the ad to disclose that specific details about the fund are found in the prospectus, that the fund's prospectus should be read carefully before investing, and where the fund's prospectus can be obtained. (33450)

When publishing total return data, the minimum recommended illustration period is:

The lesser of 10 years or the life of the company or account: FINRA guidelines state that communications with the public regarding investment companies and variable contracts that show total return data should generally cover a period long enough to reflect variations in value through different market conditions. A period of 10 years is the recommended illustration period. However, if the company or account hasn't been in existence for 10 years, then the illustration period should be for the life of the company or account. (33512)

A "breakpoint sale" is BEST defined as:

The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions: A breakpoint sale is the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. This practice is done to assess higher sales charges on transactions and is a violation of the Conduct Rules. (89793)

A mutual fund ad that includes performance charts must assume the customer paid:

The standard sales charge for the fund being advertised: All retail communications must be based on the highest sales charge assessed by the fund. Showing a lower than maximum sales charge would be considered misleading and a violation of FINRA rules. (85116)

A 529A or ABLE account is administered by:

The state government: Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments. (37368)

A variable life insurance policyholder has just died. Which of the following statements best describes the tax consequences of his variable life insurance policy?

The value of the policy will be included in the deceased estate for tax purposes: Although there are no tax consequences to a variable life insurance policy's beneficiary, the death benefit is included in the deceased estate for tax purposes. (87658)

After selling some of her ABC Growth Fund shares at a loss, Nadia realizes she had purchased some shares of the same fund 14 days earlier. Which of the following tax rules would apply?

The wash sale rule: Investors who sell securities at a loss and repurchase that same security within a 30-day period (before or after the sale) are subject to the wash sale rule. The tax deduction normally associated with a loss is currently disallowed and it must be added to the basis of the purchased securities. (85212)

Which of the following statements concerning ETFs is TRUE?

These funds' values may fluctuate throughout the trading day: Exchange-traded funds (ETFs) are investments that resemble unit investment trusts (UITs). A fixed portfolio is constructed either to track a specific index (such as the S&P 500) or a given market segment (such as gold or semiconductors). An ETF's portfolio typically remains constant unless there is a change to the underlying index or one of the individual investments within the fund is affected by a corporate action such as a sale or spin-off. ETFs are normally listed on Nasdaq or a traditional exchange and may fluctuate in price throughout the day as a regular stock would. They have a bid and ask as opposed to the NAV and POP found in mutual fund investments. Commissions are paid when trading ETFs as opposed to sales charges when purchasing mutual funds. (85165)

Which of the following is NOT TRUE of high-yield bonds?

They are issued by companies in bankruptcy: High-yield bonds, also known as junk bonds, are subject to higher-than-normal risk and often have higher interest payments. Although the companies that issue these bonds have greater credit risk, they are not bankrupt. (33488)

Which of the following is TRUE regarding correspondence and institutional communications?

They are subject to spot-checking by FINRA: Although correspondence and institutional communications are not subject to principal approval and filing with FINRA, they should be reviewed by a principal and are subject to spot-checks by FINRA. (33460)

An investor has a need for high liquidity with low principal risk. Which of the following would you recommend as a suitable investment based on this investment criteria?

Treasury bills: Based upon the investor's investment criteria, Treasury bills would be most suitable. Since a Treasury bill is a short-term instrument (maturing in one year or less), it has a low principal risk. There is also a considerable secondary market for Treasury bills, making them highly liquid. (84013)

If an associated person signs the arbitration clause that's included in Form U4, he is agreeing to:

Using arbitration as the process for resolving disputes: Form U4 contains a predispute arbitration clause. By signing this form a person agrees to using arbitration as the process for resolving disputes that involve his employer, other FINRA member firms and associated persons, and customers. Rule violations are resolved by FINRA hearing panels or SEC personnel, but not by arbitration. (37295)

Bedrock Insurance Company offers life and health insurance, as well as investment products, through its broker-dealer subsidiary. Bedrock Insurance is currently bankrupt. Who would be LEAST affected by this situation?

Variable annuity participants: Variable annuity assets are held in a separate account, which are segregated from the other assets of the insurance company. This leaves insurance policyholders and general creditors facing the financial risk. (84772)

According to Regulation SP, a privacy notice need not be provided:

When a customer purchases a life insurance policy from an insurance company: Regulation SP requires broker-dealers, investment advisers and investment companies registered with the SEC, to send privacy notices to customers at the time the relationship is established. Insurance companies are not required to provide privacy notices unless the client is purchasing a variable product. Privacy notices must be presented in written form. (88072)

The separate account of the variable life policy that Tom Jones bought is performing poorly. Does this have any influence on his death benefit?

Yes, but it could never drop below the fixed minimum: If the performance of the separate account of a variable life insurance policy is less than the Assumed Interest Rate (AIR), the death benefit will decline. However, the death benefit can never drop below the face value of the policy. (84080)