- Which of the following entities must receive a copy of retail communications to be used by a member firm in connection with the offering of investment company shares?
Correct answer: FINRA
All retail communications used in connection with a new offering must be filed with FINRA. A principal of the firm must approve its use and is responsible for corrections that FINRA may require.
- How often are firms required to file a summary report of complaints that are withdrawn by the customer?
- With FINRA every quarter
- With the SEC annually
- With the SEC quarterly
- With FINRA annually
Correct answer: With FINRA every quarter
A quarterly summary report of complaints is filed by firms with FINRA, not the SEC. It does not matter that it was withdrawn.
- Filing at least 10 business days before first use is required for which of the following?
- Literature prepared by the AGH Insurance Company highlighting the performance of its variable annuity separate accounts over the last 10 years
- Retail communication that contains a ranking published by an independent entity
- Correspondence
- Mutual fund advertisements placed by a broker-dealer that became a member of FINRA 7 months ago
Correct answer: Mutual fund advertisements placed by a broker-dealer that became a member of FINRA 7 months ago
All retail communications prepared by members within their first year of registration must be filed 10 business days before first use. For established firms, retail communications dealing with investment companies and variable products are generally required to be filed within 10 business days of first use.
- When a registered representative receives a complaint the first step should be which of the following?
- Provide the customer access to FINRA's website
- Attempt to resolve the problem immediately
- Forward the complaint to a firm principal
- Wait for 24 hours to give the customer an opportunity to calm down
Correct answer: Forward the complaint to a firm principal
Complaints should be forwarded to a firm principal immediately. A representative should not try to resolve the issue, nor should they delay forwarding the complaint.
- Written recommendations prepared by a research department for dissemination to the public need prior approval of
- A principal of the firm
- The DOE
- The appropriate SRO
- The SEC
Correct answer: A principal of the firm
This would be classified as a type of retail communication, and as such, prior principal approval is required before use.
- How long after termination must a member file Form U5?
- Within 120 days
- Within 60 days
- Within 10 days
- Within 30 days
Correct answer: Within 30 days
If a person registered with a member firm resigns or is terminated, the member must file Form U5 with the CRD within 30 days of termination date. Members must also provide a copy of the form to their former employee within the same time frame. Failure to do so within 30 days will result in a late filing fee being assessed against the member.
- To resolve a dispute FINRA prefers
- Arbitration before a code of procedure hearing
- Arbitration before mediation
- Arbitration before court proceedings
- Mediation before arbitration
Correct answer: Mediation before arbitration
FINRA prefers mediation before moving into arbitration. Arbitration is for monetary disputes; the code of procedure is for rules violations. Arbitration removes other legal action (the courts) from the process.
- Retail communications apply to all of the following except
- A billboard
- A public appearance
- An email sent to 30 existing customers
- A website
Correct answer: A public appearance
Retail communications is defined as any written communication that is distributed or made available to more than 25 retail investors in any 30 calendar-day period.
- If a member firm has a dispute with one of its registered representatives, which of the following is true?
- The representative's predispute arbitration agreement is renewed every January 1.
- The dispute must be resolved via mediation.
- The representative signed a predispute arbitration agreement upon completion of the U-4.
- The dispute will be resolved in a court of law.
Correct answer: The representative signed a predispute arbitration agreement upon completion of the U-4.
Member firms must provide, and have an associated person sign an acknowledgment, that any monetary disputes involving the associated person, firm, a customer, or any other person that is required to be arbitrated under the rules will be settled by arbitration. This acknowledgment must occur whenever a U-4 is completed or amended.
- If a person unsuccessfully attempts the Series 6 exam, how long must they wait after the first attempt before attempting the exam again?
- There is no waiting period
- 60 days
- 30 days
- 180 days
Correct answer: 30 days
There is a waiting period of 30 days after failing the exam for the first time. The period is the same after failing a second time. After a third failure, the waiting period is 180 days.
- If a registered representative wishes to place an advertisement in a local newspaper offering her services as a mutual fund representative for XYZ Funds, the advertisement must be approved by
- The SEC
- FINRA.
- Her branch office manager
- A registered principal
Correct answer: A registered principal
All retail communications are subject to approval by a registered principal before use. A branch office manager is not necessarily a principal.
- All of the following would be subject to the Conduct Rules regarding public appearances except
- An internet chat room
- A seminar discussing the products your firm has available for sale
- A presentation at a high school about mutual funds
- A radio spot saying that your offices have moved
Correct answer: A radio spot saying that your offices have moved
A radio ad is not a public appearance because it is not interactive. The other choices fit into the definition of public appearance and are required to meet the standards for public communications.
- Which of the following entities must review retail communications for investment company shares prepared by principal underwriters?
- Principal of the underwriting broker-dealer distributing the shares
- OCC
- SEC
- NYSE
Correct answer: Principal of the underwriting broker-dealer distributing the shares
A principal of the firm must approve the communication before its use. Such communication is filed with FINRA and not the other regulators listed here.
- Which of the following is not information needed to complete a Form U4?
- Employment history
- Aliases
- Residential history
- Marital Status
Correct answer: Marital Status
Education and marital status are two points that are not required for the Form U4. The others listed here are required.
- Which of the following would not be considered institutional communications with the public?
- A communication with an individual designated to act on behalf of your institutional customer
- An internal memo promoting a new product that will be offered to your firm's institutional customers only
- A letter to another broker-dealer
- A letter to a municipality offering your firm's services as an underwriter
Correct answer: An internal memo promoting a new product that will be offered to your firm's institutional customers only
Institution communications specifically exclude internal communications. Communications with another member firm, a government entity such as a municipality, or with someone designated to act on behalf of one of your firm's institutional customers would all fall within the definition of institutional communications.
- How long after a written complaint is resolved must a record of the complaint be maintained?
- Six years
- Three years
- Four years
- Ten years
Correct answer: Four years
These records must be retained for four years.
- Which of the following does not disqualify a person from associating with a member firm?
- The person has been or is expelled or suspended from membership or participation in any other self-regulatory organization.
- The person is under an SEC order denying, suspending, or revoking their registration.
- The person is under an order of a foreign financial regulator denying, suspending, or revoking their registration.
- The person was charged with felony fraud within the past 10 years.
Correct answer: The person was charged with felony fraud within the past 10 years.
Only a conviction may result in a disqualification, not a charge. An expulsion, suspension, denial, or revocation from any regulator may be grounds for disqualification.
- How often must a member firm provide a copy of the FINRA procedures to its customers?
- Annually
- Every three years
- Upon opening an account
- When the customer requests it
Correct answer: When the customer requests it
A firm must make the rules available to a customer upon request.
- All of the following complaints have regulatory standing except
- An email sent to a firm's general inbox
- A letter sent to a firm principal
- A letter sent to a firm registered representative
- A complaint delivered to a principal's voicemail
Correct answer: A complaint delivered to a principal's voicemail
For test purposes, only written complaints have regulatory standing. Note that writteni ncludes not only paper but also includes emails, text messages, instant messages, social media posts, Twitter, and so on.
- FINRA issues a complaint against ALFA Securities, a FINRA member firm, charging that the firm failed to adequately supervise one of its employees involved in a private placement. Which body of rules governs how this complaint will be handled?
- Conduct Rules
- Uniform Practice Code
- Code of Arbitration Procedure
- Code of Procedure
Correct answer: Code of Procedure
Failure to adequately supervise is a violation of the Conduct Rules. The Code of Procedure is the method prescribed for handling infractions of the Conduct Rules.
- Which of the following persons would not need to be fingerprinted under regulatory requirements?
- Devon, Alex's supervisor
- Adrian, a file clerk handling new account paperwork
- Blair, a new accounts specialist that opens accounts and processes initial deposits
- Alex, a receptionist that processes incoming mail
Correct answer: Adrian, a file clerk handling new account paperwork
Adrian, who does not work directly with customers or handle money, would not require fingerprinting. Alex likely will handle checks and certificates while opening the mail. Blair handles money, and Devon supervises Alex.
- Correspondence—one of the three categories of communication with the public—is defined as
- Communication that is targeted only at individuals who currently maintain accounts with the broker-dealer
- Written communications only that has been made available to 25 or fewer retail investors within the past six months
- Any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period
- Electronic communication only that has been made available to 25 or fewer retail investors within the past six months
Correct answer: Any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period
Correspondence can be written or electronic and targeted at either a broker- dealer's account holders or non-account holders. The criteria that makes communication a correspondence is that it is distributed to 25 or fewer retail customers within any 30-calendar-day period.
- The registration of an associated person becomes effective after
- Passing the appropriate exam
- Submission of Form U4
- Successful completion of an interview with the member firm
- Submission of Form U4 and passing the appropriate exam
Correct answer: Submission of Form U4 and passing the appropriate exam
A firm must submit a Form U4, and the person must pass the exam before a registration becomes effective.
- When filing a Form U5 a member must mark one of five reasons for the termination. Which of the following reasons would not require additional details surrounding the termination?
- Permitted to resign
- Discharged
- Other
- Voluntary
Correct answer: Voluntary
If the member checks the discharged, other, or permitted to resign box, all of the details surrounding the termination must be disclosed. A voluntary resignation is assumed to be under circumstances that will not affect future eligibility for employment within the industry. Deceased is self-explanatory.
- When a representative terminates association with a member firm, the member files which of these to record the termination?
- Form U4
- Form U5
- Form BD
- Form ADV
Correct answer: Form U5
If a person registered with a member firm resigns or is terminated, the member must file Form U5 with the CRD within 30 days of termination date.
- If a registered representative wishes to distribute a copy of a national magazine article about the GAON Mutual Fund, which of the following statements is correct?
- The article may be used without prior approval of a principal of the member firm.
- This material meets the definition of an independently prepared reprint.
- The article may be sent without prior or concurrent delivery of the GAON Fund prospectus.
- Because this material is already in the public domain, it is excluded from the rules on communication with the public.
Correct answer: This material meets the definition of an independently prepared reprint.
Copies of published articles, neither paid for nor sponsored by the investment company, are considered independently prepared reprints and must be approved by the appropriate principal before use. As with any directed communication relating to investment companies, delivery of a prospectus is required.
- How long does FINRA retain jurisdiction after the filing of a Form U5 full termination?
- 180 days
- Five years
- One year
- Two years
Correct answer: Two years
After the filing of Form U5 for a full termination, FINRA and other regulators retain jurisdiction for two years. The regulators may still require a terminated person to provide evidence and answer questions during this period.
- If a person unsuccessfully attempts the Series 6 exam three times in a row, how long must they wait after the third attempt before attempting the exam again?
- 120 days
- 60 days
- 90 days
- 180 days
Correct answer: 180 days
Someone who fails the test three times in a row must wait 180 days before sitting for the exam again.
- Per FINRA, a customer could include all of the following except
- An individual
- A trust
- A corporation
- A broker-dealer
Correct answer: A broker-dealer
Customers are any person other than a broker-dealer with whom the member has engaged, or has sought to engage, in securities activities.
- A registered representative has been doing some research on his own. He would like to share the information with some of his clients and sends an email to 15 of them. He also has some prospects he's been working on and sends the email to 12 of them during the same week. Under the FINRA rule on communications with the public, this would be considered
- An electronic communication
- Correspondence
- Retail communication
- Exempt from the principal approval requirements
Correct answer: Retail communication
FINRA defines a retail communication as "any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period." It is important to understand that retail investors includes current and prospective customers. Because this report will be sent to 27 within the 30-calendar-day period, it fits the definition. Like virtually all retail communications, principal approval is necessary before it is used. Is this an electronic communication? Yes it is, but the exam will want the more specific response—retail communication.
- A registered representative of a FINRA member firm is going to present a seminar on retirement planning. It will be a slide show, and no specific advice will be given. The expected attendance is approximately 50 people. Under the FINRA rule on communications with the public,
- This is a public appearance and no approvals are necessary
- This seminar can take place only if the recommendations are tailored to the specific needs of the audience
- The slides are considered a retail communication and need principal approval before first use
- A registered principal is required to attend to ensure that the standards of ethical conduct are maintained
Correct answer: The slides are considered a retail communication and need principal approval before first use
Under the FINRA rule on communications with the public, it is only an unscripted presentation that needs no principal approval. The use of slides changes things, and once more than 25 individuals will see them within a 30-calendar-day period, those slides are retail communications. As such, principal approval is required. Because the question states that no specific advice will be given, suitability of recommendations is irrelevant. However, all presentations at seminars should consider the nature of the audience and keep the presentation at the appropriate level.
- Which of the following does not automatically disqualify an applicant for registration?
- A misdemeanor conviction involving securities or money within the past 10 years
- Court injunctions prohibiting the individual from acting as an investment adviser
- Misstatements unwittingly made in an application for membership or registration as an associated person
- A felony conviction, either domestic or foreign, within the past 10 years
Correct answer: Misstatements unwittingly made in an application for membership or registration as an associated person
If a misstatement was truly made unwittingly, it is not grounds for disqualification. Proving that the error was an accident or a misunderstanding may be difficult, though. A felony conviction, either domestic or foreign, or a misdemeanor conviction involving securities or money within the past 10 years or court injunctions prohibiting the individual from acting as an investment adviser, an underwriter, or a broker-dealer or in other capacities aligned with the securities and financial services industry may be grounds for disqualification.
- When must a FINRA member firm make a copy of the FINRA rules available to customers?
- Annually
- Every three years
- Upon the customer's request
- In response to a complaint
Correct answer: Upon the customer's request
A firm must make the rules available to a customer upon request.
- How long does a person have, after the filing of a full termination Form U5, to associate with a member firm before they must requalify by taking an appropriate exam?
- Ten years
- Two years
- Three years
- One year
Correct answer: Two years
Within the two years a person may associate with another (or the same) member firm without requalifying (retaking the exams). If a person does not re-affiliate with a member firm within the two years, they will need to successfully pass the qualifying exams again.
- Which of the following pieces of sales material is exempt from routine spot-checking by FINRA?
- A public communication that simply offers a specific security at a specific price
- An independently prepared reprint that has been materially altered since first published
- Radio commercials
- Telemarketing scripts
Correct answer: A public communication that simply offers a specific security at a specific price
Material that makes no claims for a security, but simply states its price, is exempt from spot-checking.
- There are retention requirements for certain records of a broker-dealer. One of those is the firm's retail communications files. Under FINRA rules, copies of retail communications must be retained for
- 3 years after last use.
- 6 years after last use.
- 3 years after first use.
- 6 years after first use.
Correct answer: 3 years after last use.
Although the file must be started from the date of first use, the 3 years' record retention requirement begins from the date of final use of the piece.
- When a registered representative is guilty of a rules violation, FINRA may impose all of the following except
- Fines of unlimited amounts
- Suspension of registration
- A jail sentence of up to three years
- Baring from association with other members
Correct answer: A jail sentence of up to three years
Rules violations can result in suspensions, barring from association with other FINRA member firms, expulsion, and fines of unlimited amounts; neither FINRA nor any other SRO has the authority to arrest, indict, convict, or impose a jail sentence.
- Under the Code of Procedure, if an associated person is suspended from a FINRA member firm, he
- May immediately continue in a clerical position
- May still keep an office but may not sell for the firm
- May not remain on the member firm's premises
- May continue to sell, but only informally
Correct answer: May not remain on the member firm's premises
During a suspension period, a registered representative may not remain on a member firm's premises.
- The system that handles complaints forwarded to FINRA regarding violations of the Conduct Rules is called
- The Code of Conduct
- The Code of Procedure
- Minor rules violation
- The Code of Arbitration Procedure
Correct answer: The Code of Procedure
The Code of Procedure handles complaints filed with FINRA regarding violations of the Conduct Rules.
- If mediation fails, the dispute proceeds to arbitration. Under what circumstances may a mediator then serve on the arbitration panel?
- None
- If the panel consists of a minimum of three arbitrators
- With SEC permission
- If the panel consists of a minimum of six arbitrators
Correct answer: None
Mediators may not serve in any subsequent arbitration.
- The Code of Procedure contains requirements for
- Resolving disputes between two FINRA member firms
- Handling violations of the Conduct Rules
- Reviewing and approving accounts, trades, correspondence, and retail communications
- Resolving disputes between FINRA members and nonmember firms
Correct answer: Handling violations of the Conduct Rules
The Code of Procedure contains the requirements for handling violations of the Conduct Rules.
- A change to which of the following items requires amending the Form U-4?
- Marital status
- Member firm address
- Home address
- Vacation home address
Correct answer: Home address
A home address change requires an amendment to Form U-4. A change to the member firm's address requires the firm to amend its Form BD, but not the representative's Form U-4. Marital status and vacation home address are not items of information on Form U-4.
- All of the following rules apply for complaints except
- A record of a complaint must be maintained for four years
- Written complaints must be maintained for 10 years
- A quarterly summary report of complaints must be sent to FINRA
- A quarterly statistical report of complaints must be sent to FINRA
Correct answer: Written complaints must be maintained for 10 years
There is no 10-year requirement.
- A broker dealer's website is which type of communication?
- Institutional communication
- Research report
- Retail communication.
- Correspondence
Correct answer: Retail communication.
Websites, whether sponsored by the company itself or set up by an individual registered representative, are considered retail communications and are subject to applicable filing and recordkeeping rules. They must be reviewed and approved by a principal before first use and must contain no exaggerated claims or misleading information.
- If a registered representative is comparing two mutual funds for a customer, which of the following comparisons would not be permissible?
- Comparing two equity funds with slightly different investment objectives, even if the differences and their consequences are carefully explained
- Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund
- Comparing diversified growth funds from two different fund families
- Comparing a long-term bond fund to a shorter-term bond fund to demonstrate the trade-offs that exist between risk and return
Correct answer: Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund
A characteristic of money market funds is that they deliberately avoid growth. Thus, for the growth investor, a comparison of a money market fund to a growth fund is an unfair comparison.
- How many times may a person fail the Series 6 exam before they are permanently prohibited from sitting for the exam?
- Ten times
- There is no limit to how many times the exam may be attempted
- Five times
- Three times
Correct answer: There is no limit to how many times the exam may be attempted
There is no limit to how many times a person may sit for the exam. The waiting periods may make this impractical, and broker-dealer firms may decline to sponsor you, but FINRA imposes no limit.
- FINRA Rule 2210, communications with the public, describes several different categories of communications. One of those categories is called
- Email
- Social media
- Correspondence
- Public appearances
Correct answer: Correspondence
The three categories of communications with the public are correspondence, institutional communications, and retail communications. The other choices shown here may fit into one of those categories but are not a distinctive category in the rule.
- A representative would like to send to 50 clients a copy of an article from a major financial publication. This is an example of which of
- A research report
- Institutional communication
- Correspondence
- An independently prepared reprint (IPR)
Correct answer: An independently prepared reprint (IPR)
The three categories of communications with the public are correspondence, institutional communications, and retail communications. The other choices shown here may fit into one of those categories but are not a distinctive category in the rule.
- In order to register an associated person a member firm would complete which of these forms?
- Form U2
- Form BD
- Form U5
- Form U4
Correct answer: Form U4
To register a person the firm should complete Form U4.
- All of the following are true regarding institutional communications except
- They include communication to any entity with $50 million or more of total assets
- They must have prior principal approval
- Supervisory procedures regarding institutional communications must be readily available to FINRA
- They may never be used with a retail investor
Correct answer: They must have prior principal approval
Institutional sales material is not required to have prior principal approval; however, each member must establish written procedures for the review of institutional communications used by the member and its associated persons by an appropriately qualified, registered principal.
- FINRA encourages members in a monetary dispute to attempt to settle the disagreement before entering into arbitration. This process is called
- Pre-arbitration
- Hypothecation
- Adjudication
- Mediation
Correct answer: Mediation
In mediation, the parties attempt to work out a resolution to the dispute with the help of a third-party mediator. Mediation is nonbinding, and either party may walk away from the attempt.
- Which of the following people would not be exempt from the fingerprinting requirement?
- Casey, a representative that sells variable annuities exclusively
- Blair, a general securities representative
- Cameron, a representative that sells mutual funds exclusively
- Drew, a representative that sells limited partnerships exclusively
Correct answer: Blair, a general securities representative
Blair would need to be fingerprinted. Mutual funds, VAs, and DPPs (like LPs) do not have certificates, and these persons may be exempt from the fingerprinting requirement (though they must still be registered persons).
- How are complaints that are subsequently withdrawn reported to FINRA?
- They are not reported to FINRA
- They are included in the quarterly reports to FINRA
- They are included with the quarterly reports to the SEC
- They are included with the statistical report but not the summary report
Correct answer: They are included in the quarterly reports to FINRA
Withdrawn complaints are still included in the quarterly statistical and summary report of complaint submitted to FINRA.
- Disciplinary sanctions by the SEC, another SRO, a foreign financial regulator, or a foreign equivalent of an SRO may be cause for which of the following?
- Statutory disqualification of SEC membership
- Statutory disqualification of NASAA membership
- Statutory disqualification of AARP membership
- Statutory disqualification of FINRA membership
Correct answer: Statutory disqualification of FINRA membership
These things may result in statutory disqualification of FINRA membership. The SEC does not have members. NASAA's members are regulators. Even retired criminals may be members of AARP.
- All of the following may be included in mutual fund communications with the public except
- Total return computations
- Graphics that are prepared outside the firm if the source is disclosed
- Performance predictions
- Charts depicting 10 years of performance history
Correct answer: Performance predictions
Mutual fund performance predictions are strictly prohibited. Past performance, however, must be shown for a minimum of 10 years or since inception of the fund. Total return computations may be shown on marketing materials, including information prepared outside of the firm, provided the preparer's name is disclosed. This point is also covered in.
- The central registration depository (CRD) maintains information on the disciplinary history of all persons currently registered. A customer can access this information toll free through what service of the CRD?
- The CRD registration checker
- BrokerCheck
- Rep Referral
- Broker Background
Correct answer: BrokerCheck
The CRD maintains information on the disciplinary history of all persons currently registered. A customer can access this information toll free through the CRD's BrokerCheck. A link to BrokerCheck is required on all FINRA member firm websites.
- The Code of Procedure (COP)
- Is the application for granting extensions of time for trade settlements under Regulation T
- Is used in the processing of applications for the registration of registered representatives
- Handles OTC transactions and primary issues of stock
- Handles trade practice complaints regarding violations of the Conduct Rules
Correct answer: Handles trade practice complaints regarding violations of the Conduct Rules
The Code of Procedure is followed when handling trade practice complaints involving violations of the Conduct Rules.
- Who should handle a written complaint from a customer?
- The representative that handles the account
- A firm principal
- The representative that receives the complaint
- FINRA's Department of Complaints (DOC)
Correct answer: A firm principal
All written complaints must be handled by a firm principal. There is no FINRA Department of Complaints.
- Under FINRA rules dealing with communications with the public, a money market mutual fund with a portfolio composed primarily of U.S. government short-term obligations and an NAV that has never varied from $1 per share may state which of the following?
- Under FINRA rules dealing with communications with the public, a money market mutual fund with a portfolio composed primarily of U.S. government short-term obligations and an NAV that has never varied from $1 per share may state which of the following
- Money market mutual funds invested primarily in U.S. Treasury bills will maintain a stability of NAV at $1 per share, because T-bills are guaranteed to mature at face amount and are backed by the full faith and credit of the U.S. government.
- The fund's portfolio is invested principally in U.S. government short-term debt instruments. Because these investments are guaranteed by the full faith and credit of the U.S. government, the fund provides guaranteed protection from default and loss of principal for its investors.
- The portfolio of the fund is principally invested in U.S. government short-term debt instruments, and an NAV of $1 will be maintained.
Correct answer: Under FINRA rules dealing with communications with the public, a money market mutual fund with a portfolio composed primarily of U.S. government short-term obligations and an NAV that has never varied from $1 per share may state which of the following
Even when fully invested in U.S. government securities, money market mutual funds are specifically prohibited from implying a government guarantee or insurance on their portfolios. The principal value of these instruments is continually subject to market value fluctuation. Mutual funds may state their past performance history with the caveat that past performance is not an indicator of future results.
- All of the following would be considered either retail communications or correspondence except
- A written communication to all of the firm's customers regarding a new mutual fund being offered
- A letter to 10 individual investors within the past week regarding a new investment strategy
- An electronic communication distributed through the firm's website regarding potential opportunities with the firm as a registered representative
- An email to several municipalities sent out in a single day offering your firm's services for underwriting their municipal securities
Correct answer: An email to several municipalities sent out in a single day offering your firm's services for underwriting their municipal securities
Communications with government entities, which includes municipalities, fall under the heading of institutional communications. The others are all examples of either retail communications or correspondence, depending on how many recipients there are within a 30-calendar-day period. (Retail equals more than 25 retail investors within any 30-calendar-day period, and correspondence is 25 or fewer retail investors within any 30-calendar-day period.)
- Mutual fund promotional material may predict a rise in share prices
- If the customer signs a letter acknowledging that there are no guarantees on price performance
- Under no circumstances
- If the preparer is assured the price will rise on the basis of past performance
- If it is directed to experienced investors
Correct answer: Under no circumstances
Predictions in public communications are a violation of the Conduct Rules. This point is also covered in
- Rules regarding research reports include all of the following except
- Firms must include a rating system
- Research reports must disclose whether, within the last 12 months, the firm has received fees for investment banking services from or managed or co-managed a public offering
- Analysts must disclose in their research reports and public appearances whether they or any member of their households have a financial interest in the subject security
- Analysts' compensation may not be tied to the firm's investment banking revenues
Correct answer: Firms must include a rating system
Firms are not required to have a rating system. However, if they do have a rating system, the firm must clearly explain it. The other points here are requirements.
- A registered representative at your firm made a public appearance that was not subject to the rules of conduct regarding public appearances. Which of the following might it have been?
- Seminar discussing the products your firm offers to the public
- Announcement on television that your firm's offices have moved
- Participation in an internet chat room in which securities were discussed
- Presentation at a high school about mutual funds
Correct answer: Announcement on television that your firm's offices have moved
The television appearance did not involve mention of securities. The others all fit into the definition of public appearance and are required to meet the same standards as other communications with the public.
- Which of the following describes findings under the Code of Arbitration?
- Binding on members, but not on customers
- May be appealed to the National Adjudicatory Council
- May be appealed to the SEC
- Binding on all parties involved in a dispute
Correct answer: Binding on all parties involved in a dispute
Members and associated persons must submit disputes to arbitration. Customers are subject to arbitration only if they agree to submit to arbitration. Findings under the Code of Arbitration are considered binding on all parties involved, with no right of appeal.
- How often are firms required to file a statistical report of complaints?
- With FINRA annually
- With the SEC annually
- With the SEC quarterly
- With FINRA every quarter
Correct answer: With FINRA every quarter
A quarterly statistical report on complaints is filed by firms with FINRA, not the SEC.
- If a registered representative is suspended as a result of a hearing on a complaint issued by FINRA's Department of Enforcement, his first appeal would be to
- The SEC
- A federal court
- The Office of Hearing Officers
- The National Adjudicatory Council
Correct answer: The National Adjudicatory Council
A registered representative may appeal decisions of the hearing panelists to FINRA's National Adjudicatory Council. Appeals may then go to the SEC and finally to the federal appellate court system.
- During a period of suspension, a member must
- Have no securities dealings of any kind
- Be treated as a nonmember by other members
- Restrict activities with member firms solely to investment banking
- Restrict activities with customers solely to investment companies
Correct answer: Be treated as a nonmember by other members
A suspended member is considered a nonmember firm while the suspension is in effect. Any firm that is not a member (for any reason) must not be granted any of the rights or privileges of FINRA membership.
- A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How many days does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request?
- 3 business days
- 5 business days
- 10 business days
- 7 business days
Correct answer: 10 business days
Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.
- A statutory disqualification applies to an employee or an officer of a broker-dealer who, within the past 10 years, has
- Been sued in civil court
- Been convicted of a minor traffic violation
- Been convicted of securities-related fraud
- Been charged with driving under the influence (DUI)
Correct answer: Been convicted of securities-related fraud
Anyone who has been convicted within the past 10 years of any felony or any securities—or money-related misdemeanor—is subject to statutory disqualification. A mere charge is not enough.
- A Form U4 needs to be completed in order to
- Register a broker-dealer with FINRA
- Register with a person with the SEC
- Terminate a registration with a member firm
- Register an associated person of a member firm
Correct answer: Register an associated person of a member firm
A Form U4 is used to register an associated person of a member firm.
- If a FINRA member firm suspends a registered representative, the firm must report the suspension to
- The Arbitration Board
- The SEC
- The Administrator of each state in which the individual is registered
- The FINRA
Correct answer: The FINRA
The firm must report the suspension to its designated examining authority (DEA), in this case, the Financial Industry Regulatory Authority (FINRA).
- Which of the following violations could bar an agent from employment in the securities industry?
- Associating with a known felon
- Failing to qualify by examination as an agent
- Conviction for the misdemeanor of petty theft of money from a client
- Having a suspended drivers license
Correct answer: Conviction for the misdemeanor of petty theft of money from a client
Conviction of a felony or a misdemeanor involving money within the past 10 years may subject an individual to a statutory disqualification from the industry. Failing to pass the exam would prohibit the individual from acting as an agent but would not disqualify that individual from performing other duties.
- If a person unsuccessfully attempts the Series 6 exam twice, how long must they wait after the second attempt before attempting the exam again?
- There is no waiting period
- 60 days
- 30 days
- 180 days
Correct answer: 30 days
There is a waiting period of 30 days after failing the exam for the first time. The period is the same after failing a second time. After a third failure, the waiting period is 180 days.
- FINRA Rule 2210 treats interactive electronic forum posts, such as social media status updates, as
- Institutional communication
- Public appearances
- Retail communications
- Correspondence
Correct answer: Retail communications
Interactive electronic forum posts, such as social media status updates, are treated as retail communications rather than public appearances. However, despite the fact that they are no longer considered public appearances, the rule specifically excludes these posts from both the principal pre-use approval requirements and the filing requirements.
- Which of the following is a research report?
- A detailed discussion of a set of broad based indices
- An analyst's report on Seabird Airlines, Inc., stock
- A notice of a rating change
- A commentary on an election's economic impact
Correct answer: An analyst's report on Seabird Airlines, Inc., stock
A research report is a document prepared by an analyst or strategist, typically as part of a research team for an investment bank or broker-dealer. The others fall outside the definition of a research report.
- A registered representative of a FINRA member firm uses her personal smartphone to send a client a text message about a security in the client's portfolio. This practice is
- A personal message and does not come under the FINRA rules on communications with the public
- Considered a retail communication and must have principal approval
- Considered an electronic communication and must be reviewed by a principal
- Not permitted under FINRA rules; all electronic communications must be on company-owned devices
Correct answer: Considered an electronic communication and must be reviewed by a principal
Although many member firms do not permit use of personal devices, that is a firm's decision, not a FINRA rule. When permitted, a single message like this is considered correspondence delivered electronically. As with all correspondence, review by a principal is required. This review may be on a pre- or post-use basis. A text message sent to more than 25 persons within a 30-day period becomes retail communication.
- Which of the following is not considered retail communication?
- A report created and sent to the firm's institutional customers only
- Market letters sent to a firm's customers
- Advertisements for the firm published in the telephone directory
- A radio script that describes a firm's range of services
Correct answer: A report created and sent to the firm's institutional customers only
Written communications only available to institutional customers such as banks, insurance companies, and investment companies are classified as institutional communications. Remember, retail communication means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. One would expect that a radio show, an ad in the telephone directory, and market letters would be available to that number of retail investors.
- If an associated person recommends a security in a public appearance, all of the following are required except
- The representative must explain their personal reasons for recommending the security
- They must disclose any conflicts of interest
- The representative must have a reasonable basis for making the recommendation
- They must disclose any financial interest in the security
Correct answer: The representative must explain their personal reasons for recommending the security
Though the representative's reason for preferring the security might be interesting, this is not required. The representative must have a reasonable basis for the recommendation and must disclose any conflicts of interest.
- Which of the following is classified as an independently prepared reprint (IPR)?
- Billboard
- Article on investing produced by the member firm
- Wall Street Journal article on investing
- Market letter
Correct answer: Wall Street Journal article on investing
An IPR consists of any article reprint that meets certain standards designed to ensure that the reprint was issued by an independent publisher (like the Wall Street Journal) and was not materially altered by the member.
- Your firm has prepared some institutional sales material on several of the securities it deals in and has provided it to three mutual funds. One of the fund managers calls your firm to ask for some extra copies of the material, because he would like to send it to some of his investor friends. This request
- May be complied with as long as the adviser will not profit from any orders that result
- May not be complied with because there is no guarantee that time-sensitive information will still be valid by the time the fund manager's friends receive it
- May be complied with, as long as the copyright notice on the sales material is prominently displayed
- May not be complied with if your firm wishes to continue to treat the material as institutional communications
Correct answer: May not be complied with if your firm wishes to continue to treat the material as institutional communications
Institutional communication is just that: institutional. A member firm may not distribute such material to anyone who is not an institutional investor and may not treat material as institutional if the firm has reason to believe that it will be, or has been, forwarded to anyone who is not an institutional investor.
- Regarding communications, filing with FINRA is required for
- Radio interview
- Retail communication that includes a ranking by an independent entity
- Correspondence
- Retail communication that does not promote a product or service of the firm
Correct answer: Retail communication that includes a ranking by an independent entity
Any retail communication that includes a ranking, whether independent or not, must be filed with FINRA. The radio interview is a public appearance with no filing requirements because there is no indication of any script, slides, or handouts (which would require filing).
- Institutional communication is defined as
- Sales material received from a mutual fund or other institutional investor
- Sales material sent to both institutional investors and the general public
- Sales material sent only to an institutional investor
- Sales material sent to an institutional investor for forwarding to its public clients
Correct answer: Sales material sent only to an institutional investor
Institutional communication is any written communication that is distributed or made available only to institutional investors.
- Kim delivers a written complaint to Great Plains Brokers regarding a representative's actions. After discussing the matter with a principal of the firm, Kim withdraws the complaint. Which of the following is not true regarding Great Plains responsibilities following the resolution of the complaint?
- Great Plains must include the complaint with the quarterly statistical report
- Great Plains must retain the record for four years
- Great Plains must include the complaint with the quarterly summary of complaints
- Great Plains must report the complaint to the SEC
Correct answer: Great Plains must report the complaint to the SEC
The retention and reporting rules are the same regardless of how the complaint is resolved. The record must be kept for four years and is included with the statistical and summary report to FINRA (not the SEC).
- One of the benefits of using arbitration to settle disputes between member firms is that it
- Is not binding on both parties
- Does not allow for arguments from parties outside the industry
- Is relatively inexpensive
- Gives more time to prepare arguments
Correct answer: Is relatively inexpensive
Arbitration is a method for settling disputes between member firms that is less costly than litigation. In addition, all decisions are final and binding on all parties.
- Which of the following methods of providing access to FINRA rules for a customer would not be acceptable?
- Providing the rules in a digital form
- Providing the rules in paper form, accessible in a branch office
- Delivering a copy to the customer's home for a reasonable fee
- Providing the rules by internet access
Correct answer: Delivering a copy to the customer's home for a reasonable fee
A firm may not charge for this access.
- A record of a written complaint that is withdrawn by the customer the same day must be kept for how many years?
- Four years
- Three years
- Indefinitely
- Ten years
Correct answer: Four years
These records are maintained for four years after complaint resolution.
- A written complaint from a customer should be handled by
- The representative that receives the complaint
- The representative that handles the account
- A principal of the firm
- The representative that the complaint is about
Correct answer: A principal of the firm
All written complaints must be handled by a firm principal.
- How often are firms required to file a summary report of complaints?
- With FINRA every quarter
- With the SEC quarterly
- With FINRA annually
- With the SEC annually
Correct answer: With FINRA every quarter
A quarterly summary report of complaints is filed by firms with FINRA, not the SEC.
- FINRA encourages attempting to settle disputes by mediation before arbitration because
- It generates revenue for FINRA
- It tends to favor customers
- It is a reasonable and inexpensive step
- It tends to favor member firms
Correct answer: It tends to favor customers
FINRA sees mediation as a reasonable and inexpensive process and encourages firms to try it before arbitration.
- After a FINRA audit, if the Department of Enforcement issues a formal complaint against a member firm for alleged violations of federal securities law, the matter will be dealt with under
- The Code of Arbitration
- The Code of Procedure
- The Uniform Practice Code
- The Conduct Rules
Correct answer: The Code of Procedure
Trade practice complaints, including alleged violations of federal securities laws, are handled under the Code of Procedure.
- Prior to arbitration, FINRA requests that firms attempt to resolve a dispute through
- Mendation
- Arbitration
- Tribulation
- Mediation
Correct answer: Mediation
Mediation is the process prior to arbitration. There is no such thing as mendation. Tribulation is a bad time.
- Under the Code of Arbitration Procedure, how much time does a client have to submit a claim against a registered representative or member firm?
- 10 years
- 6 years
- 1 year
- 6 months
Correct answer: 6 years
Under the Code of Arbitration Procedure, a dispute or claim is eligible for submission to arbitration up to 6 years after the date of the dispute's occurrence.
- As a result of a complaint brought by the Department of Enforcement, FINRA may
- Indict a registered representative for a securities-related crime
- Impose a prison sentence not to exceed one year
- Fine a registered representative an amount not exceeding $15,000
- Suspend a member
Correct answer: Suspend a member
Following hearings by the hearing officer and panelists appointed by the chief hearing officer, penalties for violation of the Conduct Rules may be assessed as follows: fines (unlimited), censure, expulsion, barring, or any other procedural penalty deemed appropriate. Neither FINRA nor any other SRO has the authority to arrest, indict, convict of a crime, or give a prison sentence.
- A registered representative tells his client, "Because this investment made a 5% return for the last 20 years, it should easily do so again next year." This constitutes
- A minor rule infraction punishable with a small fine
- An acceptable statement if the account makes 5% next year
- A violation of the Conduct Rules
- A minor rule infraction with no monetary fine
Correct answer: A minor rule infraction with no monetary fine
A misleading statement, such as an attempt to predict the future, is a serious, not a minor, violation of the Conduct Rules. It may be considered fraudulent under the SEC Act of 1934.
- If it is alleged that an associated person of a member firm violated one or more FINRA rules, which arm of FINRA will issue the complaint?
- SEC
- State Securities Administrator
- Federal Reserve Board
- Department of Enforcement
Correct answer: Department of Enforcement
The Department of Enforcement has the authority to issue complaints under the Code of Procedure.
- A dispute arises between two FINRA member firms over unpaid commissions in the amount of $35,000. This dispute would be handled by
- Court action
- Acceptance, waiver, and consent
- The minor rule violation rules of the Code of Procedure
- Simplified industry arbitration
Correct answer: Simplified industry arbitration
Simplified industry arbitration is used in disputes between member firms or their associated persons when the amount in dispute does not exceed $50,000. If the dispute involves a customer, then it goes to simplified arbitration. MRV and AWC are used for Code of Procedure violations, not disputes.
- A customer delivers a written complaint but withdraws the complaint 30 minutes later. How long must the firm retain a record of the complaint?
- There is no retention requirement
- Ten years
- Four years
- Two years
Correct answer: Four years
The requirement is the same even if the complaint is withdrawn.
- The Department of Enforcement is an arm of
- The SEC
- The federal government
- The Securities Industry Association
- FINRA.
Correct answer: FINRA.
The Department of Enforcement is an arm of FINRA; it is the first body to hear and judge complaints.
- Communication rules under the Employee Retirement Income Security Act (ERISA) require that statements of account be provided to employees how often?
- Annually
- Every three years
- Quarterly
- Semi-annually
Correct answer: Annually
Employers are required to provide statement on an annual basis.
- Under what circumstances must an employee be given an opportunity to participate in a nonqualified deferred compensation plan?
- The employee has worked full time for the company for at least one year.
- The employee is not covered by an individual plan, such as an IRA or an annuity.
- The company is the employee's only source of income.
- It is solely up to the company who may participate in this type of plan.
Correct answer: It is solely up to the company who may participate in this type of plan.
Only qualified plans must be offered to all eligible employees. Because a deferred compensation plan is not qualified, the company may discriminate as to who participates in the plan.
- A person wishing to grant a registered representative the right to make investment decisions for his account does so by
- Providing a full power of attorney to someone other than the registered representative who will then instruct the representative as to investment decisions
- Providing a limited power of attorney giving discretionary powers
- Calling the representative each time he wants to place an order
- Providing a letter from an attorney
Correct answer: Providing a limited power of attorney giving discretionary powers
A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney (trading authorization).
- A client and her spouse own shares in the ACE Fund as tenants in common. She has a 60% ownership interest in the account and her spouse has the balance. If the client dies, what happens to the shares in the account?
- Her spouse would automatically own all the shares.
- Fifty percent of the shares would belong to her spouse and the remaining half would be distributed to her estate.
- Ownership of the shares would be determined by probate court.
- Forty percent of the shares would belong to her spouse and the remaining balance would be distributed to her estate.
Correct answer: Forty percent of the shares would belong to her spouse and the remaining balance would be distributed to her estate.
In a TIC account, securities pass to the deceased owner's estate. Unlike JTWROS, the percentages don't have to be equal.
- Morgan and Mackenzie have a joint tenants with rights of survivorship account with your firm. Unfortunately Mackenzie passes away. Morgan would like the funds to be in his name only. What paperwork will the firm need to accomplish the task?
- The firm may not make any changes to the account until estate paperwork is completed.
- Morgan will need to provide a death certificate and a letter authorizing the removal of the decedent's name.
- Morgan will need to open a new account and request a journal transfer of the assets to the new account.
- Morgan will need to open a new account and complete a letter of authorization to transfer the assets.
Correct answer: Morgan will need to open a new account and request a journal transfer of the assets to the new account.
A decedent's name will remain on the account. Morgan will need to open a new account and authorize a journal transfer of the assets.
- All of the following addresses are acceptable to open an account for a partnership except
- Any physical location
- A Post Office Box
- A principal place of business
- A local office
Correct answer: A Post Office Box
PO Boxes are never acceptable addresses. An actual, physical, location is required.
- Addison is interested in opening an individual account but is concerned about what happens to the money if she should die. Specifically she wants the funds to go to a particular grandchild and not be part of the general distribution of the estate. Which of the following accounts would best meet Addison's needs?
- An individual account with a transfer on death (TOD) designation
- A tenants in common account with the adult grandchild
- An LLC account with the adult grandchild as a signatory
- A joint tenants with rights of survivorship with the adult grandchild
Correct answer: An individual account with a transfer on death (TOD) designation
An individual account with a TOD meets the customer's needs. Both of the joint accounts require Addison to share ownership. The LLC is just way too much and does not meet the customer's needs.
- When and how often is your firm required to provide a privacy notice describing its privacy policies to customers?
- Only when the customer indicates a change be made in information previously supplied
- When a new account is opened and annually thereafter
- Every third year after the account has been opened
- When a new account is opened only
Correct answer: When a new account is opened and annually thereafter
Privacy notifications under Regulation S-P must be provided to customers whenever a new account is opened and annually thereafter.
- The child of one of your recently deceased clients comes to your office with several properly signed stock certificates inherited from a parent. The child does not have an account and wishes to sell the securities. An account is opened for the purpose of the liquidation. Regulation S-P would refer to this child as
- A customer
- A covered person
- A consumer
- A beneficiary
Correct answer: A consumer
Regulation S-P makes a distinction between consumers and customers. That is important because it makes a difference when it comes to annual reporting. A consumer is basically a "one-shot" client, as in this case. After the liquidation, this account will be closed and you probably won't ever hear from the child again. A customer has an ongoing relationship and requires annual privacy notices while the consumer does not.
- Information received from a customer upon opening a new account must be confirmed with the customer when?
- Within 30 days of account opening
- No later than account opening
- Within 60 days of account opening
- Within 90 days of account opening
Correct answer: Within 30 days of account opening
This information must be confirmed within 30 days of the account opening. The confirmation often takes the form of a negative confirmation letter, requesting the customer to respond if something is incorrect.
- Contribution limits for qualified plans
- Are established by the government and adjusted periodically
- Are established by the employer and are adjusted periodically
- Are established by the employer and may not change after the plan is established
- Are not set; there are no such limits
Correct answer: Are established by the government and adjusted periodically
Contribution limits are established by law. The government adjusts some of the limits periodically to reflect the impact of inflation.
- Lightning Bug Transport Corporation has undergone a change of the corporation's name. What forms are needed to reflect this name change on the company's account?
- A letter of authorization from the board to make the change
- A new account will need to be opened and the funds journal transferred
- A new account under a new tax ID number will be required
- A new account will need to be opened and the funds transferred via ACATs
Correct answer: A letter of authorization from the board to make the change
The ownership (and tax ID) do not change. A letter from the board authorizing the change is all that is needed.
- Under Regulation S-P, nonpublic personal information would not include a customer's
- Social Security number.
- Information collected through an internet cookie
- Alma mater
- Account balance
Correct answer: Alma mater
The Securities and Exchange Commission (SEC) in Regulation S-P notes examples of nonpublic personal information including a customer's Social Security number, account balances, transaction history, and any information collected through an internet cookie. The school they graduated would not be considered nonpublic personal information.
- When may a firm release nonpublic personal information to a nonaffiliated company?
- When the customer has an opportunity to opt out
- When the customer has chosen to opt out
- When proper disclosures are made only
- When proper disclosures are made to the customer and a customer has an opportunity to opt out
Correct answer: When proper disclosures are made to the customer and a customer has an opportunity to opt out
A financial institution may not disclose NPI to a nonaffiliated third party unless proper disclosures are made, and the customer has been provided an opportunity to opt out of such sharing.
- Employee Retirement Income Security Act (ERISA) rules on participation require that employers include employees age 21 or older and with
- Two years of service (4,000 hours)
- Two years of service (3,000 hours)
- One year of service (2,000 hours)
- One year of service (1,000 hours)
Correct answer: One year of service (1,000 hours)
Participation rules require all employees with one year or more of service (1,000 hours) who are age 21 or older must be included in ERISA plans.
- Which of the following government-issued documents would not be considered acceptable proof of identity?
- A current U.S. passport
- A current military identification issued by the U.S. Department of Defense
- A current drivers license issued by the State of Ohio
- A current birth certificate issued by Los Angeles County, California
Correct answer: A current birth certificate issued by Los Angeles County, California
A birth certificate is not an acceptable ID. Also, in order for an ID to be current, it must have an expiration. Birth certificates do not come with expiration dates.
- Rowan and Rory have a joint tenants with rights of survivorship account with your firm. Unfortunately Rory has passed away. Rowan would like the funds to be in individual only. What paperwork will the firm need to accomplish the task?
- Rowan will need to open a new account and complete a letter of authorization to transfer the assets.
- Rowan will need to open a new account and request a journal transfer of the assets to the new account.
- The firm may not make any changes to the account until estate paperwork is completed.
- Rowan will need to provide a death certificate and a letter authorizing the removal of the decedent's name.
Correct answer: Rowan will need to open a new account and request a journal transfer of the assets to the new account.
A decedent's name will remain on the account. Rowan will need to open a new account and authorize a journal transfer of the assets.
- A client and his spouse own shares in the ACE Fund as tenants in common. If each has a 50% ownership interest in the account and the client dies, what happens to the shares in the account?
- Ownership of the shares would be determined by probate court.
- His spouse would automatically own all the shares.
- The account would have to be liquidated.
- Fifty percent of the shares would belong to his spouse and the remaining half would be distributed to his estate.
Correct answer: Fifty percent of the shares would belong to his spouse and the remaining half would be distributed to his estate.
In a TIC account, securities pass to the deceased owner's estate.
- Cam and Casey own C&Cs Flowers, a small, unincorporated florist. They are looking to open an account to invest for the business. What sort of account should Cam and Casey open?
- Corporate account
- Joint tenants account
- Sole proprietor account in both names
- Partnership account
Correct answer: Partnership account
A partnership is the best choice here. Sole proprietor means one person, not two. Joint tenants would not carry the business name, and the business is unincorporated.
- Employer sponsored qualified retirement plans
- May be a trust
- Must be sponsored by a corporation
- May not be a trust
- Must be a trust
Correct answer: Must be a trust
A partnership is the best choice here. Sole proprietor means one person, not two. Joint tenants would not carry the business name, and the business is unincorporated.
- A durable full power of attorney (FPOA) continues until
- The grantor becomes incapacitated
- The grantor makes a verbal request to revoke the power
- The grantor dies
- Five years later
Correct answer: The grantor dies
A partnership is the best choice here. Sole proprietor means one person, not two. Joint tenants would not carry the business name, and the business is unincorporated.
- Taylor is an active trader that believes they can achieve higher return by moving in and out of the market. Taylor is best described as which of the following?
- Taylor is a buy-and-hold investor.
- Taylor is a conservative investor.
- Taylor is likely a mutual fund investor.
- Taylor is an aggressive investor.
Correct answer: Taylor is an aggressive investor.
Taylor is an aggressive investor. Mutual funds do not work well for most frequent traders.
- ERISA regulations apply to which of the following?
- Public sector retirement plans
- Armed forces retirement plans
- Federal government employee retirement plans
- Private sector retirement plans
Correct answer: Private sector retirement plans
ERISA rules protect private sector retirement plans from mismanagement. Federal government and other public sector retirement plans are covered by other regulations.
- Firms are required to institute a customer identification program (CIP) under the provisions of which of these?
- Securities Exchange Act
- The Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act (USA PATRIOT)
- Bank Secrecy Act (BSA)
- Anti-Money Laundering Act
Correct answer: The Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act (USA PATRIOT)
The requirement for a CIP extends primarily from the provisions of the USA PATRIOT Act. Rules regarding trading and needing certain basic levels of information are present in the BSA and the Securities Exchange Act. Anti-money laundering provisions appear in several different legislative acts, however, the BSA contains most of the AML rules in place today.
- Assets may be transferred from one account to a different account within the same firm by use of which of these?
- Transmittal notation
- Transfer initiation form
- Journal letter
- Transfer notice
Correct answer: Journal letter
The requirement for a CIP extends primarily from the provisions of the USA PATRIOT Act. Rules regarding trading and needing certain basic levels of information are present in the BSA and the Securities Exchange Act. Anti-money laundering provisions appear in several different legislative acts, however, the BSA contains most of the AML rules in place today.
- A transfer on death (TOD) designation may be made for all of the following account except
- Joint tenants with rights of survivorship (JTWROS)
- Tenants in common (TIC)
- Individual
- Tenants in the entirety
Correct answer: Tenants in common (TIC)
The structure of a TIC account requires that the decedent's interest in the account is distributes through their estate. This prohibits the function of a TOD designation. All of the others here may have a TOD designation. Note that in a joint account the TOD becomes effective after the death of the last tenant.
- To avoid tax and penalty, an IRA may be rolled over once every
- Quarter
- 3 years.
- 12 months.
- Calendar year
Correct answer: 12 months.
IRA rollovers, which must be completed within 60 days, may be done no more often than once during a rolling 12-month period. This limit is per person, not per account.
- All of the following statements concerning IRA contributions are true except
- If you file your taxes on January 15, you may deduct your IRA contribution even if it is not made until April 15
- Between January 1 and April 15, you may make contributions for the current year, the past year, or both
- You may make contributions for the past year after April 15, provided you have filed an extension on a timely basis
- You may contribute to this year's IRA from January 1 of this year until April 15 of next year
Correct answer: You may make contributions for the past year after April 15, provided you have filed an extension on a timely basis
You may contribute to an IRA only until the first tax-filing deadline (April 15), even if you filed an extension.
- An agent of a broker-dealer must obtain all of the following when opening a customer account except
- Investment objectives
- Date of birth
- Marital status
- Occupational history
Correct answer: Occupational history
A customer's occupational history is not required when opening an investment account. Their current occupation is requested and is considered an important part of knowing your customer, but it is not a regulatory requirement.
- For a non-U.S. person, all of the following are acceptable documents for a customer identification program except
- An alien ID
- A local school ID
- A foreign passport
- Another current, government issued, photo ID
Correct answer: A local school ID
A school ID does not meet the standards set under the USA PATRIOT Act. The others listed here generally do, dependent on the issuing nation.
- All of the following would be acceptable methods for the customer to opt out of allowing the broker-dealer to share his nonpublic personal information except
- Opting out electronically
- Checking a box
- Writing a letter
- Calling a toll free number
Correct answer: Writing a letter
Writing a letter is considered too difficult. The process to opt out must be virtually effortless.
- Which of the following describes a limited liability company (LLC)?
- A legal entity that protects the investors from the company's liabilities but functions like a C corporation for taxes
- A legal entity that protects the investors from the company's liabilities and is a separate taxable entity
- A legal entity that does not protect owners from the company's liabilities but functions like a partnership for taxes
- A legal entity that protects the investors from the company's liabilities but functions like a partnership for taxes
Correct answer: A legal entity that protects the investors from the company's liabilities but functions like a partnership for taxes
An LLC is a legal entity that protects the investors from the company's liabilities but functions like a partnership for taxes. C corporations protect, but are separate tax paying entities. Sole proprietor and partnerships provide no liability protection and do not pay taxes.
- Dale would like for his daughter, DeAnna, to manage his brokerage account. He would like her to be able to place trades and request funds be transferred to other accounts or have checks sent to him. Which of the following would be best for Dale?
- Appoint DeAnna as LPOA for the account.
- Appoint DeAnna as FPOA for the account.
- Add DeAnna as a TOD beneficiary to the account.
- Add DeAnna as a joint tenant to the account.
Correct answer: Appoint DeAnna as FPOA for the account.
A full power of attorney meets the customer's needs. An LPOA may not request funds. A joint account makes the daughter an owner, and the TOD designation does not grant her any access to the account.
- A registered representative for a FINRA member firm would like to open a brokerage account at a different member firm. Which of the following must they have to do so?
- Justification, in writing, for the need to open the account
- Verbal authorization from their employer
- A letter they drafted attesting that they may open the account
- Written authorization from their employer
Correct answer: Written authorization from their employer
Opening the account would require written permission from their firm. A letter the representative wrote is not sufficient.
- An investor who works for the city is ready to retire. The city has operated a Section 457 plan for its employees, in which he has participated. What portion of his withdrawals will be taxable?
- Growth and earnings only
- Cost base only
- The entire amount
- None
Correct answer: The entire amount
Although nonqualified, a 457 plan is a type of deferred compensation plan for state and local governments and tax-exempt employers for their employees. As such, the money in the plan has never been taxed, therefore all the distributions will be taxed as ordinary income.
- Which of the following is an example of a discretionary trade?
- The customer requests a representative purchase 100 shares of MNO Corp. common stock when they think best.
- The customer requests a representative buy 300 shares of a good tech company.
- The customer requests a representative buy 300 shares of BuyStuff, Inc., stock.
- The customer requests a representative sell 300 shares of BuyStuff, Inc., from their account.
Correct answer: The customer requests a representative buy 300 shares of a good tech company.
The customer must specify the investment to be purchased, not just "a good company." Time authority does not constitute discretion.
- Which of the following is considered nonpublic personal information under Regulation S-P?
- Customer's alma mater
- Social Security number
- Customer's surname
- State of residence
Correct answer: Social Security number
Your name is not nonpublic information; that is rather hard to keep secure. Both the Social Security and drivers license numbers are often used for verification of an identity. Your mother's maiden name is often used as a security question or code.
- Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member, must validate the positions in the account within how many business days of receipt?
- Five days
- Four days
- Seven days
- One day
Correct answer: One day
Within one business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account, and within three business days following validation, the carrying firm must complete the transfer of the account.
- Paul has been appointed by the court to be guardian of his sister, Julie, replacing the prior guardian. In order for Paul to take control of the brokerage account, he will need to take which of the following steps?
- Present the court's letter authorizing the change and open a new account
- Present the court's letter authorizing the change and complete a new account form
- Present an LOA from Julie and complete a new account form
- Present an LOA from Julie and open a new account
Correct answer: Present the court's letter authorizing the change and complete a new account form
First, Julie can't sign anything. That is why there is a court appointed guardian. Paul must fill out a new account form to be authorized to manage the account, but there is no need to open a new account as no change of ownership is taking place.
- The regulation enacted by the Securities and Exchange Commission (SEC) to protect the privacy of customer information is known as
- The Bank Secrecy Act
- Regulation S-P.
- Regulation D.
- The Trust Indenture act
Correct answer: Regulation S-P.
Privacy requirements are mandated in Regulation S-P enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information.
- A customer who has just started an IRA will be vested
- In two years
- At age 70
- Immediately
- In five years
Correct answer: Immediately
Investors are always vested immediately in their IRAs. An IRA must be funded with earned income from the owner of the account. Any contribution to a retirement plan that comes from the employee is vested immediately.
- Your customer purchases 1,000 shares of First Mate Coffee Company at a price of $20 a share in a margin account. How much cash would the customer deposit in order to pay for the trade?
- $10,000
- $20,000
- $15,000
- $5,000
Correct answer: $10,000
You may assume that the Regulation T margin requirement is 50% (unless otherwise stated). For a $20,000 purchase the customer would be required to deposit $10,000 (50% of the trade).
- Before opening a securities account, which of the following critical information must be obtained to satisfy Department of Treasury requirements to impede money laundering and terrorist activity?
- Customer name, address, tax ID number, cash or margin account
- Customer percentage of ownership in a public company (10%), name, date of birth, occupation
- Customer name, address, Social Security number, date of birth
- Customer name, investment objectives, occupation, citizenship, cash or margin account
Correct answer: Customer name, address, Social Security number, date of birth
Four critical pieces of information about a customer's identity must be obtained to fortify the Department of Treasury's efforts to fulfill its obligation to comply with the USA PATRIOT Act of 2001 to determine if the person appears on any list of suspected terrorists or criminal enterprises that look to launder money. Firms are required, without exception, to obtain the following before opening an account and then independently verifying the information promptly after opening an account: customer name, address, Social Security or tax identification number, and date of birth. Do not confuse this requirement with other information. Designated examining authorities (DEAs) such as FINRA expect brokerage firms to obtain sufficient information about a new customer to make suitable recommendations. If a customer is unwilling or unable to provide all the information needed, the firm may be excused from getting it. However, without sufficient information to make a recommendation, none may be made. That said, remember that no excuse is available for the four critical pieces of information needed to frustrate money launderers and terrorists.
- Three brothers open a joint account instructing you that, if they die, they want the cash and securities in the account to go to the remaining parties to the account. The account should be opened
- As a custodial account
- As tenants in common
- With rights of survivorship
- As a TOD account
Correct answer: With rights of survivorship
Under joint tenants with right of survivorship, each brother's interest in the account would go to the surviving brother. Although JTWROS accounts may be opened with a TOD designation, that is not the best answer to this question—that is a feature that would be added to the account. From time to time, you will see questions on the exam where it will be a challenge to choose between two "good-looking" answers. The key is to pick the one that is the most appropriate to the specific question.
- An account opened under the rules of the Uniform Transfer to Minors Act (UTMA) must include which of the following?
- One or more adult custodians and one minor beneficiary
- One adult custodian and one minor beneficiary
- One adult custodian and one adult or minor beneficiary
- One adult custodian and one or more minor beneficiaries
Correct answer: One adult custodian and one minor beneficiary
A custodial account may have one adult custodian and one minor beneficiary when opened. The beneficiary may reach the age of majority after the account is opened, but a new custodial account requires that the beneficiary be a minor.
- The best account for a married couple who both need access to the account and want to maintain control if one of them should pass away would be which of these?
- Family limited partnership (FLP)
- Tenants-in-common (TIC)
- Family trust
- Joint tenants with rights of survivorship (JTWROS)
Correct answer: Joint tenants with rights of survivorship (JTWROS)
The JTWROS account meets this client's needs and is easily established. Both the family trust and the FLP may be valid alternatives, but the JTWROS is the best response based on the available information.
- An employee of a FINRA member firm wishes to open an account at another member firm. The member firm opening the account
- Must notify FINRA of the account
- Must obtain permission from FINRA to open the account
- Must obtain the employing firm's permission to open the account
- Must give notice to the employing firm and must inform the employee that his employer will be notified of the account
Correct answer: Must obtain the employing firm's permission to open the account
Persons associated with one FINRA member firm may open securities accounts at other member firms. The firm opening the account must notify the employing firm in writing and receive the employing member's prior written consent in order to open the account.
- Which of the following would be considered excessive transactions?
- A customer orders 5,000 shares of an over-the-counter stock. The registered representative orders 100 shares for himself before placing the customer's order.
- A registered representative buys and sells the same security for a customer three times during a single day.
- A registered representative places a customer's securities into the firm's investment account.
- A customer orders 100 shares. The registered representative places an order for him for 200 shares.
Correct answer: A registered representative buys and sells the same security for a customer three times during a single day.
Without further information, it would seem likely that trading the same security three times in one day would be viewed as excessive trading. Purchasing the incorrect amount, commingling, and front running are prohibited practices, but they are not classified as churning (excessive transactions). Churning is defined in the SIE.
- Which of the following account types would normally be opened by a court appointed fiduciary on behalf of an adult unable to manage their own affairs?
- Custodial account
- Trust account
- Guardianship account
- Joint tenants account
Correct answer: Guardianship account
The question describes a fiduciary acting as a court appointed guardian. A guardianship account is best.
- Which of the following is not required on a new account form?
- A principal's signature
- The customer's name
- The customer's signature
- The customer's tax identification or social security number
Correct answer: The customer's signature
It may seem odd, but the regulations do not require a customer's signature for a new account. Most broker-dealer firms do require a signature as policy, but not the regulators. A principal's signature accepting the account for the firm is required.
- An irrevocable trust may be modified by which of the following persons?
- None of these
- Trustee
- Grantor
- Beneficiary
Correct answer: None of these
An irrevocable trust is irrevocable. A court may modify the trust by court order, but none of the persons listed here may change the terms of the trust.
- Adrian and Alex are tenants in a joint account. If Adrian passes away their share of the account will be distributed through Adrian's estate. What type of account is this?
- Tenants-in-common (TIC)
- Tenants by the entirety
- Transfer on death (TOD)
- Joint tenants with rights of survivorship (JTWROS)
Correct answer: Tenants-in-common (TIC)
A TIC account requires that a decedent's portion of an account be identified and distributed as part of the decedent's estate. In JTWROS and TBE accounts the decedent's interest remains in the account and becomes the property of the survivors. A TOD designation only comes into play after the last account holder dies.
- In order to open a new account for an individual, all of the following information must be obtained except
- Social Security number.
- Name and address of current employer
- Date of birth
- Current residence address
Correct answer: Name and address of current employer
Under the PATRIOT Act of 2001, we must get the birth date for all clients. We ask for employment information but can open an account if the client refuses to give it to us.
- Under the rules governing the activities of broker-dealer firms, prior consent of the employing firm would not be required in order for a registered representative of the firm to
- Open a margin account at another broker-dealer
- Discuss investment strategies with a brother whose account is at another broker-dealer
- Have trading authority in a spouse's account at another broker-dealer
- Open a cash account at another broker-dealer
Correct answer: Discuss investment strategies with a brother whose account is at another broker-dealer
Prior written consent from an employing broker-dealer is required for an associated person of the broker-dealer to open an account (cash or margin) at another broker-dealer, or any account in which the associated person has a beneficial interest, such as a spouse. Discussing investment strategies with a sibling who has an account at another broker-dealer does not require notification or consent of the employing broker-dealer.
- The term for a customer pledging securities as collateral for a margin loan is
- Hypothecation
- Rehypothecation
- Encumbering
- Leverage
Correct answer: Hypothecation
Hypothecation is the term for pledging an asset as collateral for a loan. Encumbering is not a term used in margin borrowing. Rehypothecation is between a broker-dealer and a bank. Leverage is the use of borrowed money to make an investment.
- Buying stocks on margin has all of the following potential benefits except
- Leveraging potential returns
- Accelerating the customer's rate of return
- Limiting downside exposure
- Lower initial cash outlay
Correct answer: Limiting downside exposure
Margin increases the downside risk while simultaneously increasing the potential return based on a smaller amount of cash invested. Using borrowed funds to make an investment may be referred to as leverage.
- All of the following securities would be suitable investments for a traditional IRA except
- A corporate bonds.
- AAA municipal bonds.
- AAA U.S. government agency bonds.
- Blue-chip common stocks
Correct answer: AAA municipal bonds.
Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.
- Don is a young man, just beginning his career as an engineer at the ABC Corporation. He doesn't have a lot of financial obligations, and he'd like to start saving for his retirement. Which of the following retirement plans would favor his situation the most?
- 403(b) plan
- 401(k) plan
- 529 plan
- Keogh plan
Correct answer: 401(k) plan
The only plan listed that Don is eligible for is the 401(k) plan. This plan happens to favor younger employees because the money has time to grow. The Keogh is for self-employed businesses, the 403(b) is for public sector employees, and the 529 plan is a vehicle used to save for post-secondary (college) education.
- All of the following are true regarding nonqualified deferred compensation plans except
- Employees may use accumulated funds as collateral for a bank loan
- IRS approval is not needed for deferred compensation plans.
- The plans need not be offered to all employees
- Income taxes on compensation are not due until constructive receipt
Correct answer: Employees may use accumulated funds as collateral for a bank loan
Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary (that the employee will receive) upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.
- If a customer works as a nurse in a public school, each of the following statements regarding his school's TSA plan are true except
- Mutual funds and CDs are available investment vehicles
- Distributions before age 5921 are normally subject to penalty tax
- He is not eligible to participate
- His contributions are before tax
Correct answer: He is not eligible to participate
Because he is employed by a public school system, your customer is eligible to participate in the tax-sheltered annuity plan.
- An employee's contribution to a corporate sponsored qualified retirement plan are
- Vested on a graded schedule
- Vested after three years
- Always vested
- Vested after five years
Correct answer: Always vested
Employees are always fully vested in the funds they contribute to an ERISA-covered plan. Vesting schedules only apply to the employer's contribution.
- Under the Employee Retirement Income Security Act of 1974 (ERISA), all of the following guidelines for the regulation of retirement plans are true except
- All qualified plans require a written plan document
- Fully vested employees are entitled to the accumulated retirement accounts if they leave the employer
- A corporation in business for three years must establish a retirement plan for employees
- Funds contributed to a retirement plan are required to be segregated from corporate assets
Correct answer: A corporation in business for three years must establish a retirement plan for employees
A corporation is not required to sponsor retirement plans for employees, but should it choose to sponsor a qualified retirement plan, it must follow ERISA guidelines.
- Which of the following are correct when describing a nonqualified retirement plan?
- Distribution are tax free
- Tax on accumulation is deferred
- Plan must meet IRS guidelines
- Distributions are fully taxable
Correct answer: Tax on accumulation is deferred
Both qualified and nonqualified plans accumulations are tax deferred. In a nonqualified plan no IRS guidelines need be met. Distributions may, or may not, be tax free. Any return of the basis is tax free; earnings above the basis are taxed as ordinary income at distribution.
- Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except
- Corporate pension plans
- Keogh plans.
- Deferred compensation plans
- Profit-sharing plans
Correct answer: Deferred compensation plans
Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.
- Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements?
- Reporting and disclosure
- Nondiscrimination
- Funding
- Vesting
Correct answer: Funding
Funding covers how an employer contributes to, or funds, a retirement plan.
- What is the latest date that an IRA participant may make an IRA deposit for the current year?
- July 15 of the following year, if extensions have been filed
- December 31 of the current year
- April 15 of the current year
- April 15 of the following year
Correct answer: April 15 of the following year
Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.
- If a corporation begins a nonqualified retirement plan, which of the following statements is true?
- Employee contributions grow tax deferred if they are invested in an annuity.
- Employee contributions are tax deductible.
- The employer must abide by all ERISA requirements.
- Employer contributions are tax deductible.
Correct answer: Employee contributions grow tax deferred if they are invested in an annuity.
Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral, such as an annuity contract. Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements.
- All of the following are corporate qualified retirement plans except
- Profit-sharing plans
- Defined contribution plans
- Deferred compensation plans
- Defined benefit plans
Correct answer: Deferred compensation plans
Deferred compensation plans, in which the employee defers salary and/or bonuses to fund a retirement benefit, are not qualified plans.
- A nonqualified deferred compensation plan
- Must be approved by the IRS
- Does not guarantee that the employer will fulfill its obligation
- Must be offered to all employees
- Guarantees payment to the employee even if the company becomes insolvent
Correct answer: Does not guarantee that the employer will fulfill its obligation
Nonqualified deferred compensation plans are agreements between an employer and an employee in which the employee agrees to defer receipt of part of their salary. Nonqualified deferred compensation plans do not require IRS approval and may discriminate (need not be offered to all employees). In fact, they are generally offered only to officers and other high-ranking executives. In the event of a business failure, there is no guarantee that deferred amounts will be paid.
- All of the following statements regarding TSA plans are true except
- Only teachers may participate
- Growth in the account is tax deferred
- Distributions after age 5921 will be taxed as ordinary income
- Early withdrawals for a vacation will incur a 10% penalty
Correct answer: Only teachers may participate
Employees of schools, church organizations, and nonprofit organizations are eligible to participate in a 403(b) TSA plan, not just teachers.
- Your customer has contributed $1,000 annually into her Roth IRA for seven years. Which of the following statements concerning her Roth IRA distributions is true?
- Your customer will pay ordinary income taxes on the part of the distribution that represents earnings.
- The distributions are taxed as ordinary income.
- Your customer will not be taxed on the distributions if she is over the age of 5921 and the money has been held in the account for five years, beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual.
- The distributions are taxed as capital gains.
Correct answer: Your customer will not be taxed on the distributions if she is over the age of 5921 and the money has been held in the account for five years, beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual.
Distributions from Roth IRAs made after age 5921 are tax free if the money was in the account for five years, beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Contributions to Roth IRAs are made with after-tax dollars.
- In an effort to safeguard customer information, which regulation specifies securing desktop and laptop computers and encrypting email?
- Regulation T
- The Securities Exchange Act
- Regulation A
- Regulation S-P
Correct answer: Regulation S-P
Safeguard requirements such as securing desktop and laptop computers and encrypting email to protect customer information is an obligation of financial institutions under Regulation S-P.
- When a customer instructs a registered representative to transfer and ship, the representative instructs the margin department to transfer ownership into
- The brokerage firm's name and deliver the securities to the customer
- The customer's name and deliver the securities to the customer
- The customer's name and deliver the securities to the customer's bank for safekeeping
- The brokerage firm's name and deliver the securities to the brokerage firm's commercial bank for safekeeping
Correct answer: The customer's name and deliver the securities to the customer
The term transfer and ship means to transfer the securities into the name of the customer and ship (deliver) the securities to the customer. To hold in street name would require the securities to be transferred into the name of the broker-dealer and held for safekeeping.
- Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering?
- Privacy notices
- Customer identification programs (CIPs)
- Specially Designated Nationals and Blocked Persons (SDN) list
- Do-not-call lists
Correct answer: Customer identification programs (CIPs)
The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money laundering activities.
- All of the following addresses are acceptable to open an account for a corporate pension trust except
- Any physical location
- A trustees office address
- A local office
- A Post Office Box
Correct answer: A Post Office Box
PO Boxes are never acceptable addresses. An actual, physical, location is required.
- Knowing a customer means gaining an understanding of which of the following?
- Financial needs
- Nonfinancial circumstances
- All of these
- Financial circumstances
Correct answer: All of these
Knowing your customers means more than just knowing their financial information. It includes an understanding of their circumstances and needs, both financial and nonfinancial.
- In order to open an account a broker-dealer must collect all of the following information except
- Customer's name
- Customer's tax ID number
- Customer's job history
- Customer's address
Correct answer: Customer's job history
A customer's job history is not required information when opening an account; a name, address, and tax ID number (or the fact it has been applied for) are required.
- Broker-dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must
- Provide notice to customers each time a transaction occurs within the account and provide reasonable means for customers to opt out of such disclosures
- Provide reasonable means for customers to opt out of such disclosures only at the time of the account is opened
- Provide notice to customers at the time of the account opening and provide reasonable means for customers to opt out of such disclosures
- Require that customers wishing to opt out send a written request with signature witnessed by a notary
Correct answer: Provide notice to customers at the time of the account opening and provide reasonable means for customers to opt out of such disclosures
Regulation S-P requires that if a broker-dealer reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter. Means to opt out of the disclosures must be reasonable and easy. Requiring a written request to opt out would not be considered reasonable means under the regulation.
- Which of the following is not considered nonpublic personal information under Regulation S-P?
- State-issued drivers license number
- Customer's mother's maiden name
- Social Security number
- Customer's name
Correct answer: Customer's name
Your name is not nonpublic information; that is rather hard to keep secure. Both the Social Security and drivers license numbers are often used for verification of an identity. Your mother's maiden name is often used as a security question or code.
- Obtaining all of the following complies with the regulations regarding customer identification programs except
- Post office box, instead of a physical address, if it is the primary mailing address
- Date of birth
- Taxpayer identification number
- Name
Correct answer: Post office box, instead of a physical address, if it is the primary mailing address
A post office box is never acceptable without a physical address.
- FINRA Rule 2090, the know your customer (KYC) rule obligates a firms and associated person to
- Seek certain information from customers
- Demand certain information from customers
- Place entries for general information for the customer to complete
- Require certain information from customers
Correct answer: Seek certain information from customers
The language of the rule is that the broker-dealer firm and associated persons use reasonable diligence to know and retain the essential facts concerning every customer. The rule allows some flexibility in dealing with customers who do not provide the information requested.
- In an effort to safeguard customer information, which regulation specifies securing computers, placing customer information in locked files, and encrypting email?
- Regulation T
- Regulation S-P.
- Regulation A
- The Securities Exchange Act
Correct answer: Regulation S-P.
Safeguard requirements such as securing desktop and laptop computers and encrypting email to protect customer information is an obligation of financial institutions under Regulation S-P. Paperwork that contains customer's NPI must be kept secured.
- Which of the following would not be sufficient to verify a customer's identity when opening an account?
- U.S. Department of Defense ID
- U.S. passport
- Government issued birth certificate with photo
- State issued drivers license
Correct answer: Government issued birth certificate with photo
A birth certificate would not be acceptable for this purpose, even with a cute baby picture. Among the requirements is that an ID be current. Being current requires a valid date and an expiration date. Birth certificates do not come with an expiration date.
- All of the following are provisions of Regulation S-P except
- The firm must initially when opening the account and annually thereafter provide the customer with a privacy notice
- The firm must give the customer the opportunity to opt out at the opening of the account
- The firm must give the customer the opportunity to opt out semiannually
- The firm has an obligation to protect the privacy of customer information
Correct answer: The firm must give the customer the opportunity to opt out semiannually
The firm is required to give the opportunity to opt out annually, not semiannually.
- The regulation enacted by the Securities and Exchange Commission (SEC) based on the Gramm-Leach-Bliley Act and intended to protect a customer's nonpublic personal information is called
- The Trust Indenture Act
- The Bank Secrecy Act
- Regulation S-P.
- Regulation D.
Correct answer: Regulation S-P.
Privacy requirements are mandated in Regulation S-P enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information.
- Emery is currently serving in the U.S. Air Force and would like to open an account. Which of the following addresses that Emery can provide would not meet the requirements of a customer identification program?
- Emery's permanent stateside home address
- Emery's parents' home address
- Private Mail Box (PMB) Emery has had for five years
- Emery's APO box number
Correct answer: Private Mail Box (PMB) Emery has had for five years
A PO Box (or PMB) number is not acceptable; all of the other address types here would be acceptable as part of a CIP.
- A durable limited power of attorney (LPOA) continues until
- The grantor makes a verbal request to revoke the power
- The grantor becomes incapacitated
- Five years later
- The grantor dies
Correct answer: The grantor dies
All POAs end with the death of the grantor. A durable power survives incapacity of the grantor, but not death. Powers of attorney must be revoked in writing by the grantor.
- Lando Entertainment Corporation has undergone a change of the corporation's name. What forms are needed to reflect this name change on the company's account?
- A new account will need to be opened and the funds journal transferred.
- A letter of authorization from the board is needed to make the change.
- A new account under a new tax ID number will be required.
- A new account will need to be opened and the funds transferred via ACATs.
Correct answer: A letter of authorization from the board is needed to make the change.
The ownership (and tax ID) do not change. A letter from the board authorizing the change is all that is needed.
- Your customer, Lane, has an individual account. For personal reasons Lane has legally changed their last name. What would your firm need to change the name on Lane's account?
- Written authorization only
- Legal evidence of the name change and verbal authorization
- A letter of authorization (LOA) and evidence of the legal name change
- Verbal authorization only
Correct answer: A letter of authorization (LOA) and evidence of the legal name change
This type of change is not uncommon. To change the name on the account, your firm would need a written authorization (LOA) and legal evidence of the change like a marriage certificate or a court order.
- A power of attorney (POA) may be removed by any of the following methods except
- Verbal request from the grantor
- Death of the appointed attorney
- Written request from the grantor
- Death of the grantor
Correct answer: Verbal request from the grantor
The death of either party ends the power. A grantor must remove the POA by written request.
- A transfer of assets between accounts at different firms generally takes place through which of the following systems?
- Transfer of Account System (TOAs)
- Automated Customer Transfer System (ACATs)
- New York Stock Exchange
- National Clearing Services Corporation
Correct answer: Automated Customer Transfer System (ACATs)
Most transfers of this type will go through the ACATs system. We refer to this type of transfer as a TOA, but that is not the system name. Clearing corporations may handle some of the work, but the system is called ACATs. The NYSE doesn't do this.
- Susan is the grantor of the Heilmann Family Revocable Living Trust. She would like to appoint her daughter, Darlene, as trustee. What forms are needed to do this?
- A new trust will need to be formed with Darlene as trustee.
- Susan and Darlene will open a new account, and Susan will request a journal transfer of the assets.
- Susan will need to submit a letter of authorization for the change, and Darlene will need to complete a new account form.
- Susan will submit a letter of authorization, and Darlene will accept the appointment.
Correct answer: Susan will need to submit a letter of authorization for the change, and Darlene will need to complete a new account form.
There is no change of ownership, so the account will remain the same. As Susan is the grantor (and the trust is revocable) she may make this change. Darlene will need to complete a new account form to be able to manage the account.
- A guardian is appointed
- After the time an account is opened
- By the beneficiary
- At the time an account is opened
- Prior to the account opening
Correct answer: Prior to the account opening
Guardians are appointed by courts to manage the affairs of an adult who is unable to do so. This appointment must be in place prior to the account opening.
- In an ACATs transfer the firm that will hold the assets after the transfer is called
- The receiving firm
- The new firm
- The carrying firm
- The holding firm
Correct answer: The receiving firm
The firm that receives the assets is the receiving firm. It really is that simple.
- Which of the following constitutes a discretionary account?
- Customer account in which the investor gives the representative the authority to buy or sell securities
- Trading account of the registered representative
- Trading account of the broker-dealer
- Mutual fund account allowing periodic withdrawals
Correct answer: Customer account in which the investor gives the representative the authority to buy or sell securities
A discretionary account is an account in which a representative has been given authority to select the amount and type of investment transactions for a client; the authorization must be in writing.
- Paige has an individual account. For personal reasons Paige has legally changed their last name. What would your firm need to change the name on Paige's account?
- A letter of authorization (LOA) and evidence of the legal name change
- Verbal authorization only
- Legal evidence of the name change and verbal authorization
- Written authorization only
Correct answer: A letter of authorization (LOA) and evidence of the legal name change
This type of change is not uncommon. Your firm would need a written authorization (LOA) and legal evidence of the change (like a marriage certificate or a court order) to change the name on the account.
- When determining whether a registered representative is churning an account, each of the following is taken into consideration except
- Rating of securities traded
- Motive of the representative
- Size of positions traded
- Frequency of trades
Correct answer: Rating of securities traded
Excessive trading in a customer's account, whether in terms of size or frequency, is a prohibited practice known as churning. When regulators investigate allegations of churning in an account, the registered representative's possible motivation is considered. The rating of the traded securities is not a factor in churning investigations.
- In an ACATs transfer the firm that holds the assets before the transfer is called what?
- Receiving firm
- Home firm
- Carrying firm
- Sending firm
Correct answer: Carrying firm
This is the carrying firm. The receiving firm receives the assets from the carrying firm.
- Morgan and Mackenzie have a joint tenants account with your firm. The account is under Morgan's Social Security number. In order to bring the assets under Mackenzie's Social Security number, what forms will the firm require?
- Mackenzie will need to open an individual account, authorize the transfer, and then add Morgan on to the account.
- They will need to open a new joint account and both authorize a journal transfer to the new account.
- They will need to provide a letter of authorization to make the change.
- They will need to open a new account and perform a transfer through the ACATs system.
Correct answer: They will need to open a new joint account and both authorize a journal transfer to the new account.
They will need to open a new joint account and then both authorize the transfer.
- One of the differences between granting discretion and appointing an investment adviser (IA) to an account is
- Discretion is granted to a firm, but IA trading authority is granted to an individual representative
- IAs have a fiduciary duty, but representatives granted discretion do not.
- Representatives granted discretion have a fiduciary duty, but IAs do not
- Discretion is granted to an individual, but IA trading authority is granted to the firm
Correct answer: Discretion is granted to an individual, but IA trading authority is granted to the firm
Discretion is granted to a specific representative of a BD firm; customers grant the IA firm the authority to manage the account. Both IAs and reps exercising discretion have a fiduciary duty to the customer.
- A contractual plan company is what type of investment company?
- Closed-end company
- Unit investment trust
- Face-amount certificate company
- Mutual fund
Correct answer: Unit investment trust
A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis. Though contractual plans are no longer sold, there are still many such contracts in force.
- Open-end investment company shares normally go ex-dividend on what date?
- Two business days before the record date
- The settlement date
- The record date
- A date determined by the investment company board of directors
Correct answer: A date determined by the investment company board of directors
The ex-dividend date is the date the shares are reduced by the amount of dividend distribution. To receive the dividend, purchaser transactions must settle before the ex-dividend date, which is determined by the investment company board of directors.
- The KPF Growth Fund charges no redemption fee. An investor brings 200 shares to your firm for redemption. The next quote on the fund is NAV $9.15, POP $10.00. If liquidated by the firm without charge, what would he receive for his shares?
Correct answer: $1,830
Investors redeem their mutual fund shares at the next calculated net asset value or bid price. Two hundred shares liquidated at $9.15 = $1,830. If there were a redemption charge, it would be subtracted from the total.
- Your customer is interested in income that is as free of default risk as possible. Which of the following funds would you consider suitable to recommend to him?
- The Ellis Government Bond Fund
- A balanced fund that purchases only AA-rated bonds or higher
- A fund that specializes in municipal revenue bonds
- The Topley Investment-Grade Corporate Bond Fund
Correct answer: The Ellis Government Bond Fund
Government securities are considered essentially free of default risk because the bonds derive their income from federal taxes. The customer should be made aware that government bonds, and the funds that invest in them, are not free of interest rate risk.
- Which of the following is a key advantage of purchasing a variable annuity?
- Tax deferral
- Protection against market risk
- Tax-free withdrawals
- Minimal penalty for early withdrawal
Correct answer: Tax deferral
Tax deferral is a key advantage of purchasing a variable annuity. The separate account of a variable annuity is subject to market risk. Early withdrawals from a variable annuity are subject to a 10% penalty, along with ordinary income taxes on the growth portion above the cost basis.
- John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability?
- The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate
- The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 5921 years old
- Entire amount taxed as ordinary income, because it is not life insurance
- None, because it is the proceeds from a life insurance company
Correct answer: The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate
Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.
- Typically, no-load mutual funds are sold to the public in which of the following ways?
- The fund sells to investors through their custodian bank.
- The fund sells to a broker-dealer with which it has a selling agreement, which in turn sells to the investor.
- The fund sells directly to the investor.
- The fund sells to an annuity, which in turn sells to the investor.
Correct answer: The fund sells directly to the investor.
No-load funds sell directly to the investor through their own sales force.
- A retired public school teacher, age 65, has deposited a total of $10,000 into a nonqualified variable annuity, and her account's current value is $16,000. If she wishes to take a lump-sum withdrawal of the full amount, how much of this withdrawal is taxed at the ordinary income tax rate?
Correct answer: $6,000
Contributions to a nonqualified annuity represent cost-base dollars. When the contributions are paid out, cost base represents a return of capital and is not subject to tax. The growth in an annuity is tax deferred and is taxable upon receipt. In this case, of the total distribution of $16,000, the return of contributions was $10,000, leaving $6,000 taxable as ordinary income.
- If your customer, age 36, invested $1.2 million dollars with an insurance company to purchase an annuity that would begin payouts to him when he reached the age of 65, he would be purchasing
- A delayed payment annuity
- A periodic payment, deferred annuity
- A single payment, immediate annuity
- A single payment, deferred annuity
Correct answer: A single payment, deferred annuity
The annuitant paid a lump sum for his annuity to provide for his retirement, which is deferred to sometime in the future. He has thus purchased a single payment, deferred annuity.
- Which of the following is guaranteed by a variable life policy?
- No sales charge
- Minimum separate account performance
- Minimum death benefit
- Cash value
Correct answer: Minimum death benefit
A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts.
- In the prior year, your customer realized an $8,000 short-term capital loss and a $6,000 long-term capital gain. What are the tax results of these transactions?
- No gains, and $2,000 in carry forward losses
- They may reduce their income by $2,000
- $2,000 in short-term capital losses to use against next year's gains
- $2,000 long-term capital gain
Correct answer: They may reduce their income by $2,000
The losses offset the gains, leaving a $2,000 loss that may be used to reduce their taxable income.
- Which of the following statements describing the federal taxation of municipal bond fund distributions is true?
- Dividend distributions are taxable; capital gains distributions are tax free.
- Both dividend distributions and capital gains distributions are taxable.
- Dividend distributions are tax free; capital gains distributions are taxable.
- Both dividend distributions and capital gains distributions are tax free.
Correct answer: Dividend distributions are tax free; capital gains distributions are taxable.
Interest income from municipal bonds is exempt from federal taxation and remains so when a bond fund distributes it as dividends. Capital gains on municipal bonds, however, are taxable. Therefore, capital gains distributions made by the fund to shareholders are taxable distributions. Information on this question is also part of
- In order for an investor to realize a capital gain or loss,
- A dividend must be distributed
- The investor must hold the security for more than one year
- A purchase must take place
- A sale must take place
Correct answer: A sale must take place
In order for a capital gain or loss to be realized, a sale must occur. The holding period will define the gain or loss as long or short-term.
- Which of the following statements regarding the suitability of investment recommendations are true?
- Only the client is responsible for learning about the investments that are purchased.
- Growth and income mutual funds are suitable for all investors.
- A client's investment objectives, prior investment experience, financial profile, and risk tolerance aid in determining suitability.
- Suitability will tend to be the same within a given demographic.
Correct answer: A client's investment objectives, prior investment experience, financial profile, and risk tolerance aid in determining suitability.
Knowledge of the client's investment objectives, investment experience, financial and tax status, and risk tolerance all contribute to an understanding of a client's suitability. No two investors have precisely the same in investment needs and characteristics.
- BuyStuff, Inc., is a NYSE listed big box retailer. BuyStuff stock has a beta coefficient of 1.2. If the S&P 500 goes up 5% the expected return for BuyStuff stock is which of these?
Correct answer: 6%
Beta is a measurement of a security's sensitivity (or volatility) to the security's market, in this case a BuyStuff stock and the S&P 500. If the beta is 1.2, then the stock will, on average, move 20% more than the index. To find the expected return, multiply the index return by the beta. 1.2×5=6.
- Which of the following is considered to be the order of the stages in a business cycle?
- Trough, contraction, expansion, peak
- Prosperity, expansion, contraction, trough
- Expansion, peak, contraction, trough
- Contraction, trough, peak, expansion
Correct answer: Expansion, peak, contraction, trough
The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point, as long as the stages are shown in the right order, the answer is correct
- Loss of purchasing power has the greatest impact on which of the following investor profiles?
- An investor in his 20s who spends all of his paycheck on video games
- A young married couple who have a comfortable income and have just purchased their dream home
- A 35-year-old investor who owns a portfolio of high-yield corporate bonds
- An elderly person living on a fixed retirement income with little savings
Correct answer: An elderly person living on a fixed retirement income with little savings
Loss of purchasing power would have the most impact on an individual living on a fixed income.
- When recommending an investment to a customer, one of the most important items to consider is
- Market capitalization
- Commission generated
- Name of the investment
- Investment performance
Correct answer: Investment performance
Investment performance is very important when choosing investments. Commission and the name should be near to irrelevant. Market cap (size of the company) is a factor in diversification, but is secondary to performance.
- Beta coefficient is the measure of which of the following?
- A security's expected performance in percentage terms
- A stock's performance in relation to expectations
- A security's volatility in relation to its historical values
- A stock or portfolio's volatility in relation to the overall market (systematic risk)
Correct answer: A stock or portfolio's volatility in relation to the overall market (systematic risk)
A stock or portfolio's beta is a measure of its volatility in relation to the overall market (systematic risk). The overall market is typically based on the S&P 500 and is given a beta coefficient of 1.0. A security that has a beta of 1.0 moves in line with the market. A security or portfolio with a beta greater than 1.0 is generally going to be more volatile than the overall market. The reverse is true when the beta is less than 1.0.
- During a fact-finding interview with a potential client, your client information sheet is used to list detailed financial information. Which of the following items would be relevant in determining a prospect's net worth?
- $78,000 current IRA balance
- $225,000 annual income
- Recently paid off $3,000 credit card balance
- A potential inheritance
Correct answer: $78,000 current IRA balance
Net worth is computed by subtracting liabilities from assets. The IRA balance is an asset. The credit card debt was a liability, but because it has been paid, it no longer appears on the financial statement. Income is important, but it does not figure into net worth until it is deposited into a bank or invested in something. Similarly, the inheritance is not part of net worth until it is received.
- In a fiduciary account with stated investment objectives of preserving capital and generating income, which of the following investment trading strategies is the most suitable?
- Margin buying in a rising market
- Buying Treasury bonds
- Short-term trading in a volatile market
- Buying into a large-cap index fund
Correct answer: Buying Treasury bonds
Although still subject to market risk, Treasury bonds would be the most suitable investment listed. Margin buying is too risky for the objective of preserving capital, and short-term trading and short sales do not provide income. A stock fund does not meet the need to preserve capital.
- Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a longtime investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. Which of the following mutual funds is the most suitable for this customer?
- QRS Capital Appreciation Fund
- ABC Equity Income Fund
- XYZ Biotechnology Fund
- LMN Stock Index Fund
Correct answer: ABC Equity Income Fund
An equity fund that aims to achieve both current income and growth of income best suits the objectives and investment profile of the client. A stock index fund does not offer the current income that the client requires. The capital appreciation and biotechnology funds not only fail to provide income, they are too risky for this retired person.
- Which of the following would be found on a customer's income statement?
- The customer's risk tolerance
- The customer's income
- The customer's 401(k) balance
- The value of the customer's primary residence
Correct answer: The customer's income
Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Risk tolerance is a non-financial consideration.
- A non-qualified dividend will be taxed at what rate?
- The investor's capital gains tax rate
- The investor's ordinary income tax rate
- Qualified dividends are not taxable
- The same rate as interest payments
Correct answer: The investor's ordinary income tax rate
Non-qualified dividends are taxed as ordinary income.
- Jim's Tech Fund receives $22 million in dividends and pays $2 million in expenses. At the end of the year the fund distributes $18.5 million as dividends to the fund's shareholders. The fund will pay taxes on how much of the net investment income?
- $1.5 million
- $22 million
- $20.5 million
- $20 million
Correct answer: $1.5 million
The fund meets the requirement to qualify as a conduit because it distributes more than 90% of net investment income (NII) to shareholders. $22 million – $2 million = $20 million in NII. $18.5 million is 92.5% of NII. The fund pays taxes on the undistributed portion of NII ($1.5 million).
- Under the 1940 Investment Company Act, an investment company may take all of the following forms except
- A closed-end investment company
- A unit investment trust
- An open-end investment company
- A limited partnership with partners as passive investors
Correct answer: A limited partnership with partners as passive investors
An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount certificate companies.
- Industries that tend to be highly sensitive to inflation, deflation, and the ups and downs of business trends would best be described as
- Defensive
- Growth
- Cyclical
- Keynesian.
Correct answer: Cyclical
Cyclical industries are highly sensitive to business cycles (the ups and downs of business trends) and inflationary or deflationary trends. Most cyclical industries produce durable goods, such as heavy machinery, or material such as steel to be utilized by other industries like the automobile industry. Demand for such goods increases when we are in periods of prosperity, but during recessions, the demand for such products declines as manufacturers postpone investments in new capital goods and consumers postpone purchases of these goods.
- Each of the following is considered an investment company except
- Unit investment trust
- Bank investment advisory account
- Face-amount certificate company
- Open-end management company
Correct answer: Bank investment advisory account
A bank advisory account is not found among the definitions of an investment company.
- It is generally considered unsuitable to invest in securities using funds from which of the following?
- Earnings
- A defined contribution plan
- An inheritance
- Borrowing money against a home
Correct answer: Borrowing money against a home
Using borrowed funds, especially borrowed against another asset, is generally unsuitable, according to FINRA guidance.
- During the accumulation period of a periodic payment deferred variable annuity, the number of accumulation units
- Increases and the value per unit varies
- Remains fixed and the value per unit remains constant
- Increases and the value per unit remains constant
- Remains fixed and the value per unit varies
Correct answer: Increases and the value per unit varies
A periodic payment deferred variable annuity is one in which the investor makes more than one payment. Thus, the number of accumulation units increases. The value of each unit will vary according to the performance of the separate account.
- A 28-year-old investor wishes to start saving for his daughter's college education. Which of the following would be the least appropriate investment vehicle for this plan?
- Zero-coupon bond
- 529 plan
- Variable annuity
- Coverdell ESA
Correct answer: Variable annuity
Of the choices, the variable annuity would be a poor recommendation because withdrawals prior to age 5921 would be subject to ordinary income taxes plus a 10% penalty tax.
- Which of the following funds would be most suitable for a customer with moderate experience and risk tolerance seeking a portfolio to provide current income?
- Small-cap stock mutual fund
- Global Equity stock fund
- Biotechnology fund
- Preferred stock mutual fund
Correct answer: Preferred stock mutual fund
The preferred stock mutual fund would provide income based on the fixed dividend provided by the preferred stock in the portfolio, and it best suits the customer's needs.
- When may a Series 6 registered representative sell shares of a closed-end fund?
- Only when the shares are selling in the secondary market
- In both the primary and secondary markets
- Only when the shares are selling in the primary market
- Series 6 representatives may not sell shares of a closed-end fund
Correct answer: Only when the shares are selling in the primary market
Series 6 representatives may sell investment company shares that are sold by prospectus in the primary market.
- Who assumes the investment risk in a variable annuity contract?
- The annuitant assumes the risk.
- The insurance company assumes the risk.
- There is no risk in a variable annuity.
- The investment risk is shared between the insurance company and the annuitant.
Correct answer: The annuitant assumes the risk.
Variable annuity contracts were devised to help investors keep pace with inflation. Because this is not guaranteed, the annuitant bears the investment risk.
- A shareholder has $800 to invest in the ABC Technology Fund. If the shares are currently priced at $21.15 each, he can purchase how many shares?
- 37, with $17.45 in change
- None because the minimum trading unit is 100 shares
- 37.825 shares
- 38 shares
Correct answer: 37.825 shares
The shareholder can purchase 37.825 shares. Mutual fund shares may be sold in full or fractional amounts.
- In promoting a variable life insurance contract to a customer, which of the following statements would be permissible?
- This product is a good investment for anyone wishing to provide for retirement.
- Variable life insurance gets you a higher death benefit for less money.
- If you already have a variable annuity, you can exchange it for this type of insurance with no adverse tax consequences.
- This product gives you the possibility of a greater death benefit in exchange for accepting investment risk.
Correct answer: This product gives you the possibility of a greater death benefit in exchange for accepting investment risk.
Variable life insurance may be sold only as an insurance device, not as a retirement device. Under Section 1035, insurance may be exchanged for an annuity without adverse tax consequences, but not the reverse.
- Once a variable annuity has been annuitized,
- Each annuity unit's value varies with time, but the number of annuity units is fixed
- The number of annuity units is fixed, and their value remains fixed
- Each annuity unit's value is fixed, but the number of annuity units varies with time
- Each annuity unit's value and the number of annuity units vary with time
Correct answer: Each annuity unit's value varies with time, but the number of annuity units is fixed
During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. The value of an annuity unit varies from month to month according to the performance of the separate account in comparison with the assumed interest rate.
- A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale?
- 31 days
- No waiting period
- 5 days
- 20 days
Correct answer: 31 days
When a customer sells a security at a loss, he may not buy back the same (or substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed.
- The Windmill Balanced Fund holds a mix of stocks and bonds. In the current year they received $500,000 in dividends from stocks and $600,000 in interest from bonds. Over the year they have had $100,000 in expenses. What is the fund's net investment income?
- $1 million
- $900,000
- $1.1 million
- $2.1 million
Correct answer: $1 million
The formula for net investment income is dividends + interest – expenses. $500,000 + $600,000 = $1.1 million. $1.1 million – 100,000 = $1 million.
- The cost basis of inherited shares are based upon which of the following?
- The decedent's cost basis
- The average of the value on the day of the decedent's death and the decedent's original cast basis
- The average of the value on the date of death and the date the inheritor sells the position
- The value of the stock on the day of the decedent's death
Correct answer: The value of the stock on the day of the decedent's death
The cost basis of an inherited security is based on the value on the day of death.
- The Investment Company Act of 1940 requires that mutual funds pay dividends from their
- Gross income
- Capital gains
- Net investment income
- Portfolio earnings
Correct answer: Net investment income
Mutual funds dividends are paid from net investment income (interest received plus dividends received minus expenses).
- Which of the following explains that including noncorrelated assets in a portfolio can reduce certain risks?
- Alpha coefficient
- Beta coefficient
- Capital asset pricing model (CAPM)
- Modern portfolio theory (MPT)
Correct answer: Modern portfolio theory (MPT)
Instead of emphasizing particular stocks, MPT focuses on the relationships among all the investments in a portfolio. This theory holds that specific risk can be diversified away by building portfolios of assets whose returns are not correlated.
- An analysis of the existing portfolio is important when doing which of the following?
- Selecting new investments
- All of these
- Understanding a customer's circumstances
- Understanding a customer's tolerance for risk
Correct answer: All of these
All of these parts of suitability may be informed by taking a good look at a customer's current investment mix.
- A representative that has reasonable grounds to believe that options are a suitable investment for a client should take which of these next steps?
- Approve the account for option trading
- Provide a suitable recommendation
- Provide the customer an option disclosure document
- Request approval for option trading for the account
Correct answer: Provide the customer an option disclosure document
After determining suitability, a representative should provide the customer with an option disclosure document. This step is required before seeking approval to trade from a registered option principal (or other appropriate firm principal).
- Selling which of the following is not a violation of the Conduct Rules?
- Government bonds to a client who insists on high returns
- AAA bonds to a client who has income as an objective
- Options to a client who desires long-term growth
- Selling the same mutual fund to all of your clients
Correct answer: AAA bonds to a client who has income as an objective
The Conduct Rules require that client suitability be paramount. AAA-rated bonds are suitable for an income-oriented client. Government bonds will not provide high returns; they are designed for moderate income with safety of principal. Options are not suitable for a growth client. No one security is suitable for all investors because each investor has different goals, objectives, and risk tolerances.
- Which of the following activities are a registered representative's responsibilities?
- Offering tax advice and assisting customers in completing tax returns
- Determining the suitability of various investments for individual customers
- Investing for customers based on their circumstances and objectives
- Personally holding a customer's securities for a future transaction
Correct answer: Determining the suitability of various investments for individual customers
A registered representative, in addition to entering orders, is primarily responsible for determining the suitability of investments. Registered representatives execute an investor's instructions; they do not invest for them.
- Your client, age 28, has just begun to consider investing outside of her employer's 401(k) plan. She's saved $25,000 to allocate toward some capital appreciation and some income. She prefers an investment with moderate risk and some downside protection if the stock market falls. With investing being new to her, she wants to note that she understands and is comfortable with moderate risk as stated, only. Given what has been conveyed, which of the following would be the most suitable?
- Specialized fund
- Equity index fund
- Equity income fund
- Balanced fund
Correct answer: Balanced fund
A balanced fund that consists of both equities and debt instruments not only aligns with the growth objective but also, because of the debt instruments in the portfolio, adds some downside protection against falls in the market. An index fund and equity income fund are both subject to market risk should the market turn downward. Sector funds are considerably more aggressive and not suitable for an investor with moderate risk looking for some downside protection.
- Your 45-year-old client is interested in obtaining the highest current income possible from his investment. If he is willing to accept fluctuations in investment principal, which of the following would best suit this client's investment objective?
- Balanced fund
- High-yield bond fund
- Aggressive growth fund
- Tax-free money market fund
Correct answer: High-yield bond fund
Because this investor's objective is income, a bond fund is suitable. Investors who are willing to accept risk and who are interested in high income should invest in corporate bond funds with some risk of principal. These bond funds are known as high-yield corporate bond funds.
- Your customer has $200 per month of discretionary income and currently invests $200 monthly into a mutual fund. His daughter plans to enter college soon, and he would like to send her $100 monthly. Which of the following actions should you recommend to him?
- Invest $200 monthly into the mutual fund and send all dividends to his daughter.
- Invest $200 monthly into the mutual fund and redeem shares when needed.
- Invest $100 monthly into the mutual fund and send his daughter $100 monthly.
- Begin a systematic withdrawal program of $100 monthly.
Correct answer: Invest $100 monthly into the mutual fund and send his daughter $100 monthly.
There is some cost to investing money and immediately withdrawing it. Anytime that funds are deposited into a mutual fund, a sales charge of some sort would apply (unless it is a money market fund). For this reason, your customer should reduce his investment in the mutual fund and send the remaining money to his daughter.
- SEC rules require that open-end management companies distribute dividends to their investors from the firm's
- Portfolio earnings
- Net investment income
- Gross revenue
- Capital gains
Correct answer: Net investment income
Dividends must be paid from the net investment income.
- Your customer, 62 years old, has unexpectedly received a large inheritance. He would like to generate income from it now, with as little bother on his part as possible. Which of the following might you recommend to him?
- Purchase a lump-sum immediate annuity
- Purchase a lump-sum deferred annuity
- Purchase a periodic payment deferred annuity
- Invest in a diversified portfolio of corporate stocks
Correct answer: Purchase a lump-sum immediate annuity
The lump-sum immediate annuity would generate income for him at once, guaranteed as to payment but not guaranteed as to amount. The deferred annuities would have a delay first. The diversified portfolio of stock would only provide dividend income, guaranteed as to neither payment nor amount.
- The XYZ mutual fund company is introducing a new fund with an investment objective of appreciation in share price by means of capital gains. The portfolio will consist of a mix of both value stocks and growth stocks. This is most likely
- A blend/core fund
- A balanced fund
- A preferred equity income fund
- A utility income fund
Correct answer: A blend/core fund
One of the distinguishing features of blend/core funds is that they contain both growth and value stocks.
- A registered representative with a Series 6 registration can sell which of the following?
- A closed-end management investment company selling just above its NAV in the secondary market
- A REIT on its initial public offering
- An ETF trading on the Nasdaq
- A mutual fund that redeems its own shares
Correct answer: A mutual fund that redeems its own shares
The Series 6 is a limited license only allowing the sale of investment companies and variable products where a prospectus is required. This would exclude any secondary trading such as in ETFs and closed-end funds. The REIT is not an investment company, so the Series 6 would not suffice.
- When an agent explains mutual funds to a prospective investor, which of the following statements may be made?
- The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
- Mutual fund shares are liquid and may be switched from fund to fund without tax liability.
- Mutual funds must make payment within seven days of a redemption request and guarantee a return of the original investment.
- A fund always redeems shares at NAV, with little chance of a financial loss.
Correct answer: The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds easily redeemable, investors are not guaranteed to receive an amount equal to the original investment.
- If an investor starts to withdraw from a program that has $9,600 worth of funds, the first monthly payment of a 10-year self-liquidating program will be
Correct answer: $80.
The payment for the first month is determined by dividing the current balance by the total number of payments to be made, as follows: $9,600 ÷ 120 payments = $80. Each month, the current balance would have to be recalculated to account for gains or losses in NAV and for payments that have been made. Then, the second month's payment would be determined by dividing the account total by 119, rather than 120.
- An investor will pay a sales charge in all of the following marketing methods except
- Fund to underwriter to dealer to investor
- Fund to underwriter to investor
- Fund to investor
- Fund to underwriter to plan company to investor
Correct answer: Fund to investor
Fund to investor represents the sale of a no-load fund.
- When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?
- As ordinary income based on an exclusion ratio
- As capital gains based on an exclusion ratio
- As ordinary income based on LIFO accounting
- As capital gains based on LIFO accounting
Correct answer: As ordinary income based on an exclusion ratio
Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis and not subject to income taxes).
- A mutual fund that qualifies as a conduit under subchapter M of the internal revenue code will pay taxes on which of these amounts?
- The amount of the net investment income
- The net amount of the net investment income after expenses
- The total of all dividends and interest received less any expenses
- The amount of any net investment income not distributed to shareholders as a dividend
Correct answer: The amount of any net investment income not distributed to shareholders as a dividend
Conduits must pay a minimum of 90% of net investment income to qualify and will pay taxes on the amount they retain (do not pay as dividends).
- An open-end investment company that does not distribute at least 90% of its net income
- Does not require a restricted type of management
- Continues to qualify as a registered investment company based on interpretations of the IRS
- Is unable to retain all or part of its realized capital gains
- Is liable for federal taxes on its net investment income
Correct answer: Is liable for federal taxes on its net investment income
Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation.
- The AIR on a variable annuity is 5%. In March, the separate account earned 5%, which resulted in an April payment of $300. In April, the separate account earned 9%, resulting in a May payment of $325. What must the separate account earn in May to generate a $325 June payment?
- 9%
- 5%
- 3.25%
- Between 5% and 9%
Correct answer: 5%
The annuitant will receive a payment equal to the previous payment if the separate account return for the period equals the AIR.
- A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a variable life insurance policy to take advantage of the tax deferral and death benefit features. This recommendation is
- Unsuitable, because she has no need of the death benefit
- Suitable, because it offers a growth opportunity with a death benefit for a portion of her holdings
- Unsuitable, because a fixed annuity would better meet her needs
- Suitable, because it provides tax-deferral features
Correct answer: Unsuitable, because she has no need of the death benefit
The customer has no need for the death benefit (she has no immediate survivors) or tax-deferral features (with $19,200 in annual income, there are virtually no income taxes due) of a variable life insurance policy, so this transaction is unsuitable. Finally, she would be replacing income-generating assets with one that does not offer immediate income and that could reduce her income cushion to an uncomfortable margin of safety.
- Which of the following is not a major asset class under asset allocation theory?
Correct answer: Options
Options, as a derivative of an underlying security, are not a major asset class for asset allocation.
- Bob Smith, who is in his 40s, has just been placed into an extremely generous defined benefit plan at his company. He has decided that he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the years, he has invested $60,000 in the annuity, and its total value is now $80,000. How much will Bob owe in taxes and penalties if he cashes it in?
- Capital gains tax on $60,000 and a $6,000 penalty
- Capital gains tax on $20,000 and a $2,000 penalty
- Income tax on $20,000 and a $2,000 penalty
- Income tax on $60,000 and a $6,000 penalty
Correct answer: Income tax on $20,000 and a $2,000 penalty
If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 5921, he must also pay a 10% tax penalty on the growth withdrawn, a penalty of $2,000 in this case.
- Which of the following investments will require a specific disclosure regarding liquidation?
- Exchange traded fund
- Limited partnership
- Class A mutual fund
- Listed common stock
Correct answer: Limited partnership
Limited partnerships are well known as near illiquid investments. Information on the specific investments may be found as part of your SIE study material.
- Which of the following describes a wash sale?
- Re-establishing a position in a security that has been sold for a loss within a period of 60 days of the date of the loss
- Re-establishing the position in a security that has been sold for a gain within a period of 30 days of the date of the loss
- Re-establishing a position in a security that has been sold for a loss within the same calendar year as the date of the loss
- Re-establishing a position in a security that has been sold for a loss within a period of 30 days of the date of the loss
Correct answer: Re-establishing a position in a security that has been sold for a loss within a period of 30 days of the date of the loss
A wash sale occurs when an investor re-establishes the position in the same or a substantially identical security within 30 days of the date of the loss. Note that this can occur in the same day as the sale and up to 30 days before or 30 days after the date of the loss, a period of 61 days.
- All of the following are financial considerations except
- The size of a customer's mortgage
- The value of a customer's home
- The size of a customer's home
- A customer's debt service
Correct answer: The size of a customer's home
Financial considerations are those that are expressed as a dollar amount of a stream of payments. Financial considerations may be found on a customer's balance sheet or income statement.
- A regulated investment company
- Is in court receivership
- Acts as a conduit for dividend distributions
- Offers only nonredeemable shares
- Is managed by the SEC
Correct answer: Acts as a conduit for dividend distributions
If an investment company distributes at least 90% of its net investment income to shareholders, it is considered to be acting as a pipeline or conduit for the distribution; it will receive special tax treatment and is classified as a regulated investment company under Subchapter M of the Tax Code. Investment companies are registered with, not managed by, the SEC. Open- and closed-end companies may be regulated.
- ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true?
- ACE paid taxes on 91% of its net investment income last year.
- ACE paid taxes on 9% of its net investment income and capital gains last year.
- ACE paid no taxes last year because it qualified as a regulated investment company under IRC Subchapter M.
- ACE paid taxes on 9% of its net investment income last year.
Correct answer: ACE paid taxes on 9% of its net investment income last year.
ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.
- An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid?
- CDL Common Stock Mutual Fund
- QRS Money Market Mutual Fund
- XYZ International Stock Mutual Fund
- Cash value from a variable life insurance policy
Correct answer: QRS Money Market Mutual Fund
Money market funds generally come with a check-writing privilege, offering this investor the opportunity to immediately convert his asset to cash. While all mutual funds are readily redeemable, under the Investment Company Act of 1940, the fund has seven days to redeem. With the insurance company's variable contract, cash value withdrawals or loans may be delayed, by law, for as long as six months (not tested on your exam).
- The capital asset pricing model (CAPM) assumes
- That no type of risk can be diversified away
- That prices are influenced by supply and demand only
- Investors are averse to risk and expect to be rewarded for taking risk
- That those who participate in smaller transactions are generally wrong regarding timing purchases and sales
Correct answer: Investors are averse to risk and expect to be rewarded for taking risk
CAPM is used to calculate the return that an investment should achieve based on the risk that is taken; the more risk taken, the higher the potential returns. Investors should be rewarded for the risks they take. The CAPM calculates a required return based on risk. The theory assumes that investors will expect a certain level of reward based on the risk taken.
- A security's actual performance versus expectations is known as which of these?
Correct answer: Alpha
The alpha is the extent to which an asset's or portfolio's actual return exceeds or falls short of its expected returns. A positive alpha rather than a negative one is desirable.
- A 78-year-old retiree had a $100,000 CD maturing and was dissatisfied with current yields on new CDs. Aside from Social Security and a small monthly pension, the $100,000 is his total potential source of income. The registered representative recommended investing the funds in a single premium immediate variable annuity, allocating funds to the separate account as follows: $10,000 Medical Technology, $40,000 High-Yield Corporate Bond, and $50,000 Growth & Income. The registered representative's recommendation is
- Unsuitable because of the aggressive nature of the portfolio choices
- Unsuitable because of the lack of diversification of the portfolio choices
- Suitable because the portfolio mix seems likely to offer increased income to the customer
- Suitable provided the customer agrees with the recommendation
Correct answer: Unsuitable because of the aggressive nature of the portfolio choices
With the limited assets and income from Social Security and pension, a variable annuity recommendation for this client should leave out technology stocks and high-yield bonds and include high-grade bonds and/or blue-chip stocks.
- If ZB Invest Fund seeks capital appreciation, has a low dividend yield, and invests chiefly in the stock of large, well-performing companies that have earnings momentum, it is probably
- A value fund
- A sector fund
- A special situation fund
- A growth fund
Correct answer: A growth fund
ZB Invest Fund's objective describes a growth fund.
- Which of the following would be found on a customer's balance sheet?
- The value of the customer's primary residence
- The customer's monthly debt service
- The customer's risk tolerance
- The customer's income
Correct answer: The value of the customer's primary residence
Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Risk tolerance is a non-financial consideration.
- From which of the following is the 12b-1 fee deducted?
- Public offering price of a share
- Assets of the fund
- Investment advisory fee
- Difference in POP and NAV
Correct answer: Assets of the fund
A 12b-1 fee is charged quarterly as a percentage of the average annual assets.
- The value of a variable annuity separate account fluctuates in relationship to
- The general account maintained by the insurance company
- The value of the separate account portfolio
- The Consumer Price Index
- The S&P 500 market index
Correct answer: The value of the separate account portfolio
The value of the separate account fluctuates in relation to the securities held in the account.
- In a variable annuity contract, the assumed interest rate (AIR) refers to
- The rate used in the prospectus to show the potential growth of the contract
- The amount of payments required by the investor to maintain the contract
- The rate of return needed to maintain the annuity payments at a constant level
- The rate at which purchases are required in the separate account to qualify for special tax treatment
Correct answer: The rate of return needed to maintain the annuity payments at a constant level
If the earnings on an annuity exceed the assumed interest rate, the next payment will be higher; if the earnings are lower, the next payment will be lower. This holds for as long as payments are made.
- Which of the following statements describe the conduit theory of taxation?
- Dividends and interest are passed through to the investor after the fund pays taxed.
- Dividends and interest accumulate tax free to the shareholder.
- Earnings distributed by a regulated investment company are taxed three times.
- A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
Correct answer: A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.
- Investors should consider all of the following when investing in a mutual fund except
- The expense ratio
- The investment adviser
- The time horizon
- The underwriter
Correct answer: The underwriter
Time horizon, investment policy, track record of the investment adviser, portfolio, expense ratio, and sales load should all be researched when assessing a fund. The identity of the underwriter for the fund does not bear on its performance or suitability.
- Which of the following is the founder of modern portfolio theory?
- Harry Markowitz
- John Keynes
- Adam Smith
- Milton Friedman
Correct answer: Harry Markowitz
Modern Portfolio Theory was founded by economist Harry Markowitz. John Maynard Keynes is known for Keynesian economic. Adam Smith and Milton Friedman are other important economists who, sadly, are not on the exam.
- When evaluating the purchase of an immediate variable annuity for a retiree, the most important factor in determining suitability is
- Marital status of the annuitant
- The uncertainty of the amount of the monthly check
- Tax status of the annuitant
- The guaranteed minimum check amount
Correct answer: The uncertainty of the amount of the monthly check
The most important factor to consider in purchasing an immediate variable annuity is that monthly payments are subject to fluctuation based on the performance of the separate account. There is no guaranteed minimum amount.
- Which of the following statements describes the pipeline theory of taxation?
- Dividends and interest are passed through to the investor without the fund being taxed.
- Earnings distributed by a regulated investment company are taxed three times.
- Dividends and interest accumulate tax free to the shareholder.
- A fund is not taxed on earnings it distributes provided distributions equal 80% or more of net investment income.
Correct answer: Dividends and interest are passed through to the investor without the fund being taxed.
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.
- If your firm is underwriting a new mutual fund organized under a 12b-1 plan, which of the following statements is permissible in mailings or phone calls to your clients?
- This fund has a 12b-1 sales charge structure—explained in the prospectus—and should be fully understood before investing.
- Investments in no-load funds of this type do have some risks, and you will want to review the prospectus carefully.
- You will not have to pay any sales charges with this fund because our firm is buying it as a long-term investment.
- The fund has the added advantage of being a no-load investment.
Correct answer: This fund has a 12b-1 sales charge structure—explained in the prospectus—and should be fully understood before investing.
Any statement or reference to a mutual fund offered under a 12b-1 plan that implies the fund is no-load, unless the fee is 0.25% of net assets or less, is considered misleading, and is a violation of the Conduct Rules. Unless 0.25% of net assets is specifically mentioned, assume any 12b-1 fund is a loaded fund.
- The manager or adviser of an investment company may liquidate portions of the fund's portfolio
- At any time
- Only with the approval of a majority of the shareholders
- At any time, provided it is within the policies and objectives stated in the fund's prospectus
- Only with the approval of the board of directors
Correct answer: At any time, provided it is within the policies and objectives stated in the fund's prospectus
Managers or advisers of investment companies buy and sell securities in accordance with the policies and objectives of the fund as stated in the prospectus.
- If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend?
- Foreign stock
- Money market
- Biotechnology
- Aggressive growth
Correct answer: Money market
The client's monthly income requirements suggest that the money market fund, the most liquid and safest of the investments, is the most appropriate.
- Your customer originally invested $20,000 into the ACE Growth Fund and has reinvested dividends and gains of $8,000. His shares in ACE are now worth $40,000. He exchanges his investment to the ACE Income Fund. Which of the following statements is true?
- He is not liable for taxes in the current year because he did not have constructive receipt of the money at conversion.
- He retains a $20,000 cost basis in the ACE Income Fund because of the conversion privilege.
- He retains his cost basis of $28,000 in the ACE Income Fund.
- He must declare $12,000 as a taxable gain upon exchange into the ACE Income Fund.
Correct answer: He must declare $12,000 as a taxable gain upon exchange into the ACE Income Fund.
The exchange privilege offers exchange without an additional sales charge, but the exchange is still taxable. The customer is taxed on the gain of $12,000 ($40,000 − $28,000). The taxes on $8,000 (dividends and capital gains) were taxed in the years that distribution took place.
- Which of the following would not be listed as an asset on a company's balance sheet?
- Notes issued by the company
- Current assets held by the company
- Fixed assets of the company
- A company's intangibles
Correct answer: Notes issued by the company
A liability, like a note issued by the company, is not an asset. Intangible assets are listed under "other assets."
- Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she states that she is not comfortable with stock market risk. Which of the following fund types would be the least appropriate recommendation?
- Balanced or hybrid fund
- Municipal bond fund
- Blend/core fund
- Government income fund
Correct answer: Blend/core fund
Stock market risk is reduced by owning shares of bond funds, particularly those containing government or municipal bonds. Of the equity funds, the balanced fund is generally considered to offer the greatest protection of principal. Blend/core funds, which own value and growth stocks and even some blue-chip stocks, carry a higher degree of market risk than these others.
- Your 75-year-old customer has read many articles about variable annuities and would like you to choose one that would be appropriate for his $100,000 investment. Your customer has a well-diversified investment portfolio and is not currently in need of additional income. The most appropriate response to your customer's request in this situation is that
- A variable annuity may be a suitable choice, provided it has subaccount choices that are invested in highly rated bonds and other low-risk alternatives
- A variable annuity is probably not a suitable investment choice because of your investor's age and the contingent deferred sales charges that apply on withdrawals
- The tax-deferred growth feature of the variable annuity may make this a good investment alternative for your customer
- A variable annuity is probably not a suitable investment choice because of the extra costs associated with an insurance benefit your customer doesn't need
Correct answer: A variable annuity is probably not a suitable investment choice because of your investor's age and the contingent deferred sales charges that apply on withdrawals
Although deferred growth is very attractive for many investors, the advanced age of this investor is a red flag. Seniors generally should maintain investment liquidity, which is not accomplished through a variable annuity because of contingent deferred sales charges that often continue for five to seven years.
- If the owner of a variable annuity dies during the accumulation period, any death benefit will
- Be returned to the separate account
- Be paid to the IRS
- Be paid to the issuing company to complete the plan
- Be paid to a designated beneficiary
Correct answer: Be paid to a designated beneficiary
The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased.
- Qualified dividends are taxed at what rate?
- The same rate as interest payments
- The investor's capital gains tax rate
- Qualified dividends are not taxable
- The investor's ordinary income tax rate
Correct answer: The investor's capital gains tax rate
A qualified dividend payment is taxed at the investor's capital gain tax rate.
- Amy bought 300 shares of Cooper Advanced Research, Inc., at a price of $72 per share. After holding the shares for three months, Amy sold the stock for $73 per share. From this transaction Amy realizes
- A $300 long-term capital loss
- A $300 short-term capital loss
- A $300 short-term capital gain
- A $300 long-term capital gain
Correct answer: A $300 short-term capital gain
Amy sold the stock for one dollar more than she bought it, so generating a one dollar gain. With a holding period of three months, the gain will be taxed as a short-term gain.
- Which of the following statements describe the pipeline theory of taxation?
- Dividends and interest accumulate tax free to the shareholder.
- Dividends and interest are passed through to the investor after the fund pays taxes.
- Earnings distributed by a regulated investment company are taxed three times.
- A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
Correct answer: A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level) and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.
- Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers?
- ABC Investment-Grade Bond Fund
- ATF Overseas Opportunities Fund
- NavCo Tax-Free Municipal Bond Fund
- XYZ Government Income Fund
Correct answer: ATF Overseas Opportunities Fund
Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification.
- Which of the following is a customer probably referring to when he speaks of safety in investments?
- Steady current income
- Preservation of capital
- Long-term capital growth
- Reducing inflation risk
Correct answer: Preservation of capital
When a customer speaks of safety, he is almost always referring to preservation of capital.
- A debt fund manager, extremely sensitive to interest rate risk, has taken the opinion that interest rates will begin to come down and perhaps stay at low rates for the foreseeable future. With that opinion in mind, and wanting to take a conservative approach, which of the following would be a suitable recommendation for the portfolio?
- Below-investment-grade corporate bonds
- Adjustment bonds
- Noncallable corporate bonds
- Callable corporate bonds
Correct answer: Noncallable corporate bonds
When interest rates fall, issuers with outstanding callable bond issues are likely to call them in. From the issuers' perspective, why pay the higher rate the bonds were initially issued with if they can be called in and new bonds issued at the now lower rates. From the investor (our fund manager) perspective, if you anticipate that interest rates will be falling, noncallable bonds would be better because there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. In addition, no call risk means mitigating reinvestment risk as well. Adjustment bonds and below-investment-grade (high-yield) bonds are speculative in nature.
- A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is
- Neutral
- Bearish
- Unknown
- Bullish
Correct answer: Bearish
Because the investor has moved all assets into cash or cash equivalents, the investor must expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline. Bullish and bearish are terms discussed on the SIE exam. You should know these.
- Seabird Airlines stock has a beta coefficient of 0.8. Last year the stock declined 2% while the overall market declined 5%. What is Seabird's stock's alpha?
Correct answer: 2%
Alpha is calculated by first finding the expected return by multiplying the index return by the security's beta (−5%×0.8=−4%). Then subtract the expected return from the actual return (−2−−4=2).
- A railroad company pledges its railroad cars as collateral for a bond offering. This bond would be issued as
- A sale-leaseback bond
- A collateral trust certificate
- A unit secured trust
- An equipment trust certificate
Correct answer: An equipment trust certificate
As the name implies, equipment trust certificates are collateralized by the issuer's equipment. In most cases, this is rolling stock or some other transportation item.
- An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA-rated bonds should her registered representative recommend?
- XYZ zero-coupon bond maturing in 5 years
- MNO zero-coupon bond maturing in 8 months
- ABC 8% 10-year bond maturing in 5 years
- DEF 10-year 8% bond maturing in 8 months
Correct answer: XYZ zero-coupon bond maturing in 5 years
Because they make no interim payments, zero-coupon bonds have duration equal to maturity. Of the choices offered, only XYZ is both long term (over one year to maturity) and zero coupon.
- Which of the following is allowed during the cooling-off period?
- Sales literature may be distributed with the red herring.
- A preliminary prospectus may be given to prospective investors.
- Tombstone advertisements may not be published.
- Indications of interest received are with a specified deposit.
Correct answer: A preliminary prospectus may be given to prospective investors.
During the minimum 20-day cooling-off period, tombstone ads may be published, and a preliminary prospectus, also known as a red herring, may be distributed to prospective investors. Sales literature may not be distributed and indications of interest are not binding on either the investor or broker-dealer. No money may be brought in.
- Corporations issue commercial paper with maturities ranging from as little as one day to as long as how many days?
- 365 days
- 270 days
- 7 days
- 90 days
Correct answer: 270 days
Commercial paper has a maximum maturity of 270 days.
- A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months?
Correct answer: 6
Rule 147 stock cannot be sold to a nonresident of the state for a period of six months from the investor's purchase date.
- A customer requests information on a variable life insurance policy and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is
- Allowed if accompanied by an unmarked prospectus
- Not permitted
- Allowed if approved by a principal
- Good customer service
Correct answer: Not permitted
The prospectus is a legal document and may not be altered.
- When an option is trading, all of the following are fixed except
- The premium
- The underlying security
- The expiration date
- The strike price
Correct answer: The premium
While the option is trading, the premium is variable—determined by supply and demand in the market. The other choices are characteristics of the option when issued.
- A securities firm that holds rather than sells stock is
- Pegging
- Churning
- Taking a position
- Commingling
Correct answer: Taking a position
A firm that acts as principal by holding stock is taking or holding a long position. The firm purchases the stock, hoping to sell at a later date at a higher price.
- As a registered representative you know that red herring is another term for
- A preliminary prospectus
- A final prospectus
- A tombstone advertisement
- A registration statement
Correct answer: A preliminary prospectus
The term red herring is derived from the disclaimer printed in red on the cover page of a preliminary prospectus. Some key information that would be found in a final prospectus, such as price, is not found in the preliminary prospectus.
- If the SEC has released a security for sale, then the SEC has
- Decided the security is suitable for most persons
- Determined that the prospectus accurately discloses material facts
- Not approved the security but has cleared its sale to the public
- Verified that all information about the issuer included in the prospectus is accurate
Correct answer: Not approved the security but has cleared its sale to the public
When the SEC releases a security for sale, it allows the sale of the security but does not approve or disapprove of it as a suitable investment. The SEC also does not rule on the accuracy or adequacy of the information included in the prospectus.
- Listed securities primarily trade in which of the following venues?
- Primary market
- Over-the-counter
- Third market
- Exchanges
Correct answer: Exchanges
Listed securities trade primarily on exchanges. They are also called exchange-listed securities.
- Tocoma Coffee 5% preferred stock trades at $95 a share. What is the current yield?
Correct answer: 5.25%
A 5% preferred stock would pay $5 annually. To calculate current yield divide the annual dividend by the current market value. 5 / 95 = 5.25%
- Ms. Garcia sold 500 shares of Small Corporation stock short at $25 a share. The stock rose to $28 and she covered 200 shares. The stock then dropped to $22 and she closed the remainder of the short position. What is the result of the transactions?
- $300 gain
- $1,500 loss
- $1,500 gain
- $300 loss
Correct answer: $300 gain
Ms. Garcia received $12,500 for selling the stock short (500×25=12,500). She then purchased 200 shares for 5,600 (200×28) and 300 shares for 6,600 (300×22) for a total of $12,200 for a gain of $300.
- The portion of the JOBS Act that eases the requirements for small and medium-sized companies to raise capital is known as
- Small Company Relief Act.
- Regulation A.
- Regulation D.
- Regulation BD.
Correct answer: Regulation A.
Regulation A allows two tiers of offerings: Tier 1 to $20 million and Tier 2 to $75 million.
- According to the Conduct Rules, a member firm may give certain selling concessions to
- Member firms of other exchanges who are not FINRA members
- Nonmember broker-dealers
- Other FINRA member firms
- The general public
Correct answer: Other FINRA member firms
Members of FINRA may give other member firms concessions but must deal with the public and nonmembers at the public offering price.
- After an issuer files an S-1 statement with the SEC, a cooling-off period begins that lasts for how many days minimum?
- 20 days
- 10 days
- 30 days
- As long as FINRA desires
Correct answer: 20 days
The cooling-off period lasts for a minimum of 20 days. This process is directed by the SEC, not FINRA.
- Which of the following is not an acceptable reason to amend a Form D filing?
- Removal of non-complimentary material information
- Correct a factual error
- Correct a typographical error
- To reflect a change in the material facts
Correct answer: Removal of non-complimentary material information
Material information may not be removed, even if it is negative. The other reasons are acceptable reasons to amend the filing.
- A customer bought a bond that yields 6.5% with a 5% coupon. When the bond matures, the customer will receive
- $1,000 plus a call premium.
- $1,025.
- $1,065.
- $1,050.
Correct answer: $1,025.
Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.
- The first date on which the buyer would not be entitled to receive a declared dividend being paid by a corporation is
- The payment date
- The record date
- The declaration date
- The ex-date
Correct answer: The ex-date
To receive a previously declared dividend, the stock would have to be purchased before the ex-(dividend) date. The stockholder purchasing the stock on or after the ex-date would purchase the stock "ex-dividend," or without the dividend. Ex-date rules are heavily covered in the SIE. Keep that SIE material handy for these basic industry questions.
- A bond trades at 98 and has a nominal yield of 8%. What is the bonds current yield?
Correct answer: 8.16%
The formula for current yield is annual interest divided by current market value. An 8% bond would pay $80 a year. The bond is trading at $980 (98). 80 / 980 = 0.0816 (8.16% is the best answer.)
- Which of the following would be found in the final prospectus but not the preliminary prospectus?
- Company history
- Company financials
- Planned use of the funds
- Effective date
Correct answer: Effective date
The effective date is determined by the SEC and will not appear in the preliminary prospectus.
- Your customer purchased 100 shares on Jim's Burger Shake Corporation for $450 a share. The stock pays $22.50 in dividends annually. After the year the stock is trading at $495 a share. What is the total return for the holding period?
Correct answer: 15.0%
The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (22.5 + 45) / 450 = 15%.
- A broker-dealer who functions as an over-the-counter (OTC) market maker in a listed security is operating in which market?
- First market
- Second market
- Third market
- Fourth market
Correct answer: Third market
When a listed security is traded in the OTC market it is said to be traded in the third market.
- Which of the following is permitted during the cooling-off period?
- Solicit orders from investors
- Demonstrate SEC approval of the issue
- Obtain indications of interest
- Accept orders from investors
Correct answer: Obtain indications of interest
A preliminary prospectus may be used to gather indication of interest. No orders may be taken and the SEC never approves an offer.
- Which of the following statements regarding Treasury bills is true?
- They mature in 10 years or more.
- They pay a fixed rate of interest semiannually.
- They are issued at a discount.
- They mature in less than 10 years.
Correct answer: They are issued at a discount.
T-bills are sold at a discount and mature in 4, 13, 26, or 52 weeks. Although they mature at face value, they do not make interim interest payments. Currently, Treasury is not issuing 52-week T-bills.
- Julie sold 100 shares of DEF Corporation for $75 a share and later bought them back for $70. What was Julie's gain or loss for this transaction?
- Loss of $1,000
- Loss of $500
- Loss of $700
- Gain of $500
Correct answer: Gain of $500
Julie received $7,500 when she sold the shares and paid $7,000 to close the short position; a profit of $500.
- An investor's portfolio includes an ABC 6% bond maturing in 2020 and 100 Shares of XYZ common stock. At market close, if the stock closed at $45.45 compared with yesterday's $44.95, and the bond moved from 95 to 9521, the portfolio increased in value by
Correct answer: $55.
The gain would be $5 for the bonds (21 point for one bond is $5) and $50 for the stock ($0.50 × 100 shares) for a total of $55.
- There are a number of risks inherent in investing in equity securities. Which of the following stocks would be most affected by changes in interest rates?
- Noncumulative preferred stock
- Long-term warrants
- Treasury stock
- Common stock
Correct answer: Noncumulative preferred stock
For most investors, the primary feature of investing in preferred stock is its fixed dividend. Consequently, it is purchased for income and is more sensitive to changes in interest rates than common stock is. Warrants are not affected by interest rate movement because they only provide a right to purchase underlying common stock.
- All of the following statements regarding Treasury STRIPs are true except
- There are no semiannual interest payments
- The interest is taxed as a capital gain
- The rate of return is locked in
- The interest is realized at maturity
Correct answer: The interest is taxed as a capital gain
The interest on the bond is paid at maturity, but it is taxed as interest income over the life of the bond, not as a capital gain.
- An investor's portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?
Correct answer: $300
The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300.
- A customer purchases $50,000 worth of 10% corporate bonds at par. At the end of the day, the bonds close down a half point. The customer has a loss of
Correct answer: $250.
The customer holds fifty $1,000 bonds. One bond point equals $10. Therefore, if each bond decreases by a half point, the loss is $5 per bond; multiplied by 50 bonds, this equals $250.
- Which of the following is the safest from default risk?
- AA-rated secured bond
- AAA-rated unsecured bond
- AA-rated Industrial Development Revenue bond
- High-yield bond
Correct answer: AAA-rated unsecured bond
The more As the better! AAA-rated bonds are safer than AA-rated bonds, whether secured or not. High-yield bonds are very susceptible to default and although the IDR bond is a type of municipal bond, it is backed by the creditworthiness of a corporation, not the municipality.
- Which of the following regarding T-bills is true?
- T-bills have maturities of 1 to 10 years.
- T-bills are not a direct obligation of the U.S. government.
- Most T-bill issues are callable.
- T-bills trade at a discount to par.
Correct answer: T-bills trade at a discount to par.
T-bills trade at a discount to par, are 52 weeks or less to maturity, and are a direct obligation of the U.S. government. T-bills are also noncallable.
- Which of the following choices correctly ranks investment risk from lowest to highest?
- Common stock, corporate bonds, municipal bonds, Treasury bonds
- Treasury bonds, corporate bonds, municipal bonds, common stock
- Common stock, municipal bonds, corporate bonds, Treasury bonds
- Treasury bonds, municipal bonds, corporate bonds, common stock
Correct answer: Treasury bonds, municipal bonds, corporate bonds, common stock
Treasury bonds carry the lowest investment risk because they are backed in full by the U.S. government. Municipal bonds are next lowest because they are backed by the taxing authority and general revenues of issuing municipalities. Corporate bonds are the most risky debt instruments but are still backed by the full faith and credit of the issuer. Common stock has no promises associated with it, is junior in claim to all debt securities, and is, therefore, the riskiest investment.
- Your customer purchases a newly issued ABC Corporation 5% preferred stock for $100 a share. After holding the position for one year they sold the shares for $100 a share. What is the total return?
Correct answer: 5.0%
The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (5 + 0) / 100 = 0.05 (5%).
- An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA-rated bonds should his registered representative recommend?
- DEF 10-year 8% bond maturing in 8 months
- MNO zero-coupon bond maturing in 8 months
- XYZ zero-coupon bond maturing in 15 years
- ABC 8% bond maturing in 15 years, callable in 10 years
Correct answer: XYZ zero-coupon bond maturing in 15 years
The simplest definition of duration is that it is the time it takes for a bond's cash flow (interest payments) to equal the maturity value. Because there is no cash flow from a zero-coupon bond, its duration is equal to its maturity. Because the question says "long-term," we're not going to choose an 8-month maturity over a 15-year one.
- A customer sold short 100 shares of the stock of a company at $50 a share. The company subsequently went under and the shares became worthless. What was the customer's gain or loss?
- Gain of $2,500
- Gain of $5,000
- Loss of $5,000
- Loss of $2,500
Correct answer: Gain of $5,000
The customer received $5,000 when they sold the stock short and then the shares became worthless. A gain of $5,000.
- Which of the following, though issued by a municipality, is not backed by its taxing authority?
- Courthouse bond
- General obligation bond
- Industrial development bond
- School bond
Correct answer: Industrial development bond
An industrial development bond is issued by a municipality to provide funding for a business or a commercial facility, which is then leased to a business enterprise. The interest and principal of the bond are then paid off by the business enterprise, not the municipality.
- If your client wants to accumulate $50,000 over the next 10 years for her daughter's college education, to achieve this investment objective you would recommend
- A large-cap fund
- Zero-coupon bonds maturing in 10 years
- A high-yield corporate bond fund
- An aggressive growth fund
Correct answer: Zero-coupon bonds maturing in 10 years
Zero-coupon bonds are well suited for achieving investment goals of a stated sum within a fixed period of time. They are purchased at a discount and mature to their face value. Investors do not receive current income.
- A mutual fund shareholder purchases no-load shares at the beginning of an investment period and, at the end of the investment period, sells the shares for a gain. Which of the following statements is true?
- The expenses of the fund were lower at the end than at the beginning.
- The total assets of the fund could have been higher or lower at the beginning, depending on the securities held in the portfolio.
- The NAV per share was higher at the beginning.
- The NAV per share was lower at the beginning.
Correct answer: The NAV per share was lower at the beginning.
For a shareholder to have realized a gain on the sale of the mutual fund shares, the NAV of the shares would have been lower at the initial purchase compared with the NAV at the sale of the shares.
- Duration would be considered in evaluating which of the following investments?
- Bonds
- Growth funds
- Equities
- Variable annuities
Correct answer: Bonds
Duration measures the time in years it takes for a bond or other debt instrument to repay its cost through internal cash flows (basically the interest).
- Corporate bonds are considered safer than common stock issued by the same company because
- If there is a shortage of cash, dividends are paid before interest
- Bonds place the issuer under an obligation but stock does not
- Bonds and similar fixed-rate securities are guaranteed by SIPC
- The par value of bonds is generally higher than that of stock
Correct answer: Bonds place the issuer under an obligation but stock does not
A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation and is therefore considered riskier.
- If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, the investor will pay
- No tax until she liquidates the shares
- Capital gains rates on capital gains distributions and ordinary income rates on dividends
- Just long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares
- Ordinary income tax rates on the capital gains and dividends
Correct answer: Capital gains rates on capital gains distributions and ordinary income rates on dividends
Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.
- Capital gains distributions may be combined with income distributions to calculate annual yield on mutual fund shares
- Under no circumstances
- When the income distribution contains short-term capital gains
- When both distributions are accompanied by a source of distribution statement
- When both distributions resulted from activities occurring within the same year
Correct answer: Under no circumstances
Capital gains distributions may never be combined with income distributions when calculating yield.
- Which of the following bond prices would fluctuate the least if interest rates fall?
- 15-year unsecured bond with duration of 12
- 30-year zero coupon with duration of 15
- 30-year corporate bond with duration of 14
- 30-year mortgage bond with duration of 26
Correct answer: 15-year unsecured bond with duration of 12
Generally speaking, the rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. What we need to pay attention to here is not the original maturity of the bond but how much time is left. The truest measure of sensitivity (volatility) is the bonds' duration and the greater the duration, the greater the fluctuation in price when interest rates move.
- Regarding U.S. Government securities, the term intermediate maturity best describes
- T-STRIPS.
- T-bonds.
- T-bills.
- T-notes.
Correct answer: T-notes.
Treasury notes mature in 2 to 10 years; they are considered intermediate-term bonds.
- Transactions in all of the following are effected in the money market, as opposed to the capital market, except
- Commercial paper
- Bankers acceptances
- Municipal revenue bonds
- U.S. Treasury bills.
Correct answer: Municipal revenue bonds
The money market is the marketplace for short-term (one year or less) debt obligations. The capital market is where long-term capital is raised. Municipal bonds, being long term, are a part of the capital market.
- Which of the following is not a money market instrument?
- Municipal construction loan note (CLN)
- Newly issued Treasury notes issued to meet a specific government-funding requirement
- Federal Farm Credit Bank note maturing in one year
- Commercial paper issued by a finance corporation of a major automobile manufacturer
Correct answer: Newly issued Treasury notes issued to meet a specific government-funding requirement
A newly issued Treasury note would have a maturity of at least two years and would not be considered a money market instrument.
- Your customer purchased 100 shares of Narcissist, Inc., stock at $15 a share. After holding the position for three years they sold the stock for $22 a share. What are the results of the trade?
- $700 gain
- $500 gain
- $700 loss
- $400 gain
Correct answer: $700 gain
To calculate a gain or loss subtract the cost basis ($15) from the sales proceeds ($22). 22 – 15 = 7. Remember to multiply the "per share" result by the number of shares if the question does not specify "per share."
- Which of the following is not a characteristic of GNMA securities?
- These securities are directly backed by the U.S. Treasury.
- Interest income received on GNMAs is fully taxable at both the state and the federal level.
- Distributions are made annually.
- The usual minimum purchase amount is $25,000.
Correct answer: Distributions are made annually.
GNMA securities (Ginnie Maes) make interest-plus-principal payments monthly.
- An announcement of a new issue of a security that gives the name of the issuer, the price, and the name of the underwriter is called
- An offering memorandum
- A prospectus
- A red herring
- A tombstone
Correct answer: A tombstone
A tombstone is an announcement of a new issue that includes the name of the issuer, the price of the security, and the name of the underwriter from whom it can be purchased.
- In order for an individual to meet the requirements to be an accredited investor they must meet how many of the criteria listed in Regulation D?
- Three of the criteria
- Two of the criteria
- One of the criteria
- Four of the criteria
Correct answer: One of the criteria
An investor only needs to meet one of the criteria for individual investors listed in the regulation.
- All of the following are permitted during the cooling-off period except
- Distributing sales literature
- Placing a tombstone advertisement
- Distributing a preliminary prospectus
- Taking indications of interest
Correct answer: Distributing sales literature
During the cooling-off period, underwriters may not distribute sales or advertising literature regarding the securities to be offered. However, they may distribute a preliminary prospectus intended to gather indications of interest and place tombstone ads.
- Regulation A exempts certain security offerings from registration with the SEC. These offerings are divided into two groups called
- Group 1 and Group 2.
- Tier A and Tier B.
- Group A and Group B.
- Tier 1 and Tier 2.
Correct answer: Tier 1 and Tier 2.
Regulation A divides offering into Tiers (1 and 2) depending on the size of the offering.
- Which of the following will not be found in a final prospectus?
- Business plan
- Statement that the SEC neither approves nor disapproves of the issue
- Date and offering price
- Agreement among underwriters
Correct answer: Agreement among underwriters
The final prospectus will include information that is material to investors in order for them to make an informed decision. The agreement among underwriters is a separate document that is between the members of the underwriting syndicate. Investors do not require knowledge of what is contained in this agreement. This information is a significant part of the SIE.
- How may a registered representative use a red herring?
- It may be used to gather indications of interest.
- It may be used as a binding contract to sell shares of the offering.
- It may be distributed at any time except during the cooling-off period.
- It may be used to communicate the final offering price.
Correct answer: It may be used to gather indications of interest.
The preliminary prospectus (red herring) can be used as a prospecting tool, allowing issuers and underwriters to gather nonbinding indications of interest. It must be made available and is intended to be distributed to any customer who expresses interest in the securities during the cooling-off period. There is no final price shown in a preliminary prospectus.
- To which securities market does the Securities Act of 1933 apply?
- The new issue market
- Listed securities sold on an exchange
- The OTC market
- Securities traded between accredited investors
Correct answer: The new issue market
The Securities Act of 1933 covers the registration and disclosure requirements regarding new issues. The new issue market is also known as the primary market.
- As a registered representative you know that another term for a preliminary prospectus is
- A red herring
- A pre-registration prospectus
- A registration statement
- A tombstone advertisement
Correct answer: A red herring
The term red herring is derived from the disclaimer printed in red on the cover page of a preliminary prospectus. Some key information that would be found in a final prospectus, such as price, is not found in the preliminary prospectus.
- State securities laws allow for the sale of securities under all of the following methods except
- Notice filing
- Coordination
- Qualification
- Protestation
Correct answer: Protestation
The three methods of legally selling a security in a given state are qualification, coordination, and a notice filing. No amount of protestation will change this fact.
- After the filing of a registration for a new issue with the Securities and Exchange Commission (SEC), and still in the registration's cooling-off period, broker-dealers may
- Give a red herring to prospective investors
- Never publish tombstone advertisements
- Take binding indications of interest received from prospective investors
- Distribute sales literature with the preliminary prospectus
Correct answer: Give a red herring to prospective investors
During the cooling-off period, red herrings (preliminary prospectuses) may be distributed and tombstone advertisements may be published. Indications of interest can be taken but are nonbinding on all parties. Sales literature may not be distributed during the cooling-off period.
- Which of the following would you provide a customer interested in a new municipal bond issue?
- Final prospectus
- Preliminary prospectus
- Official statement
- Offering circular
Correct answer: Official statement
The standard disclosure document in a municipal offering is called an official statement.
- Which of the following is not found in the final prospectus?
- The material financial information
- The issuers future earnings
- The foreseeable investment risks
- A history of the business
Correct answer: The issuers future earnings
You can't provide future earnings because they are in the future. The other items listed are all requirements of both the preliminary and the final prospectus.
- Under the Securities Act of 1933, which of the following actions may a broker-dealer take before the effective date of a new offering?
- Give a client a preliminary prospectus, together with sales literature concerning the offering.
- Accept client orders.
- Give a client sales literature concerning the offering.
- Give a client a preliminary prospectus.
Correct answer: Give a client a preliminary prospectus.
During the cooling-off period, the broker-dealer may not accept orders for, or provide sales literature about, the new issue. However, the broker-dealer may provide a preliminary prospectus.
- The time period between when a registration is filed with the Securities and Exchange Commission (SEC) and the effective date is called
- The initial solicitation period
- The pre-registration period
- The initial order period
- The cooling-off period
Correct answer: The cooling-off period
The time between the registration filing date with the SEC and the effective date is known as the cooling-off period. During this time, a preliminary prospectus may be distributed to gauge investor interest but no offers to sell the securities can be made and no orders to purchase the securities can be taken. While a preliminary prospectus and tombstone ad can be used, sales and advertising literature specific to the securities cannot be.
- All of the following are criteria for a Rule 147 (Intrastate Offering Rule) except
- All investors must be from that state
- Any underwriters must be located in the state
- 100% of the issuer's assets are located in the state.
- The issuer's principal offices are in the state
Correct answer: 100% of the issuer's assets are located in the state.
One of the 80% rules is that at least 80% of the issuer's assets must be in the state, not 100%. The other rules listed above are all part of Rule 147.
- Offerings of a security through a private placement requires that the customer receive
- Nothing, private placements are exempt from disclosure requirements
- A prospectus
- An offering circular
- An official statement
Correct answer: An offering circular
Private placements, Regulation A offerings, and many other exempt securities must still provide a disclosure document commonly called an offering circular.
- All of the following would be found in a final prospectus except
- A legal opinion
- The SEC approval date
- A description of senior management
- Material financial information
Correct answer: The SEC approval date
The SEC does not approve a new issue, though they do release it for sale. The other items listed are requirements for the final prospectus.
- The disclosure document used for the offering of a Section 529 college savings plan is called
- A security memo
- An investment letter
- An official statement
- A prospectus
Correct answer: An official statement
Section 529 college savings plans are sold by official statement, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by official statement.
- Which of the following is not permitted during the cooling-off period?
- Distributing a preliminary prospectus
- Taking indications of interest
- Distributing sales literature
- Placing a tombstone advertisement
Correct answer: Distributing sales literature
During the cooling-off period, underwriters may not distribute sales or advertising literature regarding the securities to be offered. However, they may distribute a preliminary prospectus intended to gather indications of interest and place tombstone ads.
- The disclaimer stating that the SEC does not approve or disapprove of a securities issue must appear
- Anywhere within a prospectus, provided it is prominently displayed
- On all public communications distributed to prospective buyers
- On all mutual fund tombstones, prospectuses, and advertising material
- On the cover of the prospectus
Correct answer: On the cover of the prospectus
The SEC disclaimer, which states that the SEC does not approve or disapprove an issue of securities, must appear on the cover of a prospectus in bold print. This disclaimer is not required on public communications.
- All of the following are examples of a nonexempt security except
- JimCo Technology Corporation common stock.
- BuyStuff Corporation 90-day commercial paper.
- SpaceY Satellites Corporation secured bonds.
- Seabird Airlines Corporation 400-day notes.
Correct answer: BuyStuff Corporation 90-day commercial paper.
Commercial paper (maximum maturity of 270 days) is an exempt issue. The others here must register (are nonexempt) under the Securities Act.
- Which of the following is true regarding a preliminary prospectus?
- Receipt of it is a commitment that the underwriters will sell securities to the recipient.
- It is made available between the registration date and the effective date.
- The final price for the securities is published within it.
- It can be deemed an offer to sell securities to the public.
Correct answer: It is made available between the registration date and the effective date.
The preliminary prospectus (red herring) is a prospecting tool used to gauge indications of interest. It is made available to those who request it between the registration date and the effective date (cooling-off period). Receiving it is not a commitment to purchase shares and making it available is not a commitment to sell shares to the recipient. No final price would be found on a preliminary prospectus.
- A preliminary prospectus must include all of the following except
- A history of the business
- The material financial information
- The foreseeable investment risks
- The underwriting contract
Correct answer: The underwriting contract
A description of the underwriting contract is required but not the contract itself. The other items listed are all requirements of the both the preliminary and the final prospectus.
- Sales of Tier 1 securities under Regulation A require the distribution of
- An official statement
- A prospectus
- An offering circular
- A Form S-1
Correct answer: An offering circular
Regulation A requires the use of an offering circular.
- An offering circular may be used to provide disclosure for which of the following securities?
- APO of an exchange listed corporation
- A municipal bond
- A growth stock mutual fund
- Regulation A offering
Correct answer: Regulation A offering
Regulation A, private placements, and intrastate offerings all use offering circulars for disclosure.
- If a member firm is notified by FINRA that it must begin tape-recording the phone calls of its assistant representatives and registered representatives to existing and potential customers, it must do so within how many days of notification?
Correct answer: 60
A firm has 60 days to secure the equipment and begin recording.
- The New York Stock Exchange is characterized as what type of market?
- Third
- Primary
- Auction
- Negotiated
Correct answer: Auction
The New York Stock Exchange is an auction market. The OTC market is a negotiated market. The third market is the trading of exchange-listed securities over the counter. A primary offering occurs when new securities are sold by an issuer.
- The Securities Exchange Act of 1934 regulates or mandates each of the following except
- Extension of credit to customers
- Creation of the SEC
- Manipulation of the secondary market
- Full and fair disclosure on new offerings
Correct answer: Full and fair disclosure on new offerings
The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses such issues.
- A client wants to place an order to buy 200 shares of ABC stock. Which of the following is true?
- Regular way settlement is T+2 business days.
- The trade can only take place in a cash account.
- The trade can only take place in a margin account.
- Most corporate stock trades are cash settlement.
Correct answer: Regular way settlement is T+2 business days.
Always assume regular way settlement (T+2 business days) for corporate securities unless the question states otherwise. This trade can take place in a cash account or a margin account.
- When do secondary market trades of corporate securities settle?
- Two business days after the trade
- One calendar day after the trade
- One business day after the trade
- Two calendar days after the trade
Correct answer: Two business days after the trade
Corporate securities settle on the second business day following the trade (T+2).
- According to the Conduct Rules, a FINRA member firm may give certain selling concessions to which of the following?
- The general public may invest
- High net-worth institutions
- Other member firms
- Nonmembers
Correct answer: Other member firms
Members may give other members selling concessions, but sales to the public and to nonmember firms must be made at the public offering price.
- A customer asks not to receive confirmations of the trades he makes. The registered representative should
- Tell the customer to put the request in writing so the firm can process it
- Keep all confirmations in the customer file just in case they are needed for future reference
- Agree, but only with principal approval and for trades of less than $5,000
- Explain that FINRA rules don't allow for that
Correct answer: Explain that FINRA rules don't allow for that
A trade confirmation is a document that confirms a trade, its settlement date, and the amount of money due from or owed to the customer. For each transaction, the customer must be sent or be given a written confirmation of the trade at or before the completion of the transaction (settlement date). With proper documentation, confirmations can be sent to another party but someone must receive them.
- One of your clients tells you that he is trading in the fourth market. Who is he trading with?
- An individual investor
- An institution
- Nasdaq
- A broker-dealer
Correct answer: An institution
The fourth market is for trading between institutional buyers only. It bypasses broker-dealers.
- A registered representative tells a customer that by investing in government bonds, he is guaranteed to make money. Under the Conduct Rules, which of the following statements is true?
- This is ethical if the government bonds mature in less than one year.
- This is a violation because it constitutes a guarantee against market risk.
- This is a violation if the customer loses money but not if he at least breaks even.
- This is ethical because government bonds carry no risk.
Correct answer: This is a violation because it constitutes a guarantee against market risk.
Government bonds are guaranteed to pay interest and principal, but they do carry market risk. It is fraudulent to indicate to a client that he is guaranteed against loss.
- If a customer fails to pay for XYZ mutual fund shares within the required amount of time, the broker-dealer may
- Sell the securities and charge the customer for any loss
- Fine the customer based on the dollar amount of the sale
- Charge the customer double the sales load
- Cancel the order
Correct answer: Sell the securities and charge the customer for any loss
If the customer fails to pay for the shares, the broker-dealer may liquidate them to pay transaction costs. Any gain or loss is settled between the broker-dealer and the customer because the order has been executed and cannot be canceled.
- The record date
- Indicates when the public offering of new issues can be made legally
- Is set by the issuing corporation to determine which stockholders will receive a declared dividend
- Is set by the issuing corporation as the mailing date for distribution of cash dividends
- Is fixed by the SEC to determine which investors own stock
Correct answer: Is set by the issuing corporation to determine which stockholders will receive a declared dividend
The record date is set by the corporation, at which time a list of stockholders who will receive a dividend is compiled. Ex-date rules are heavily covered in the SIE. Keep that SIE material handy for these basic industry questions.
- The Conduct Rules apply to a transaction
- In government securities
- Between member firms and members of the public
- In municipal securities
- Between nonmember firms in nonexempt securities
Correct answer: Between member firms and members of the public
The Conduct Rules apply directly to all transactions between FINRA member firms and members of the public.
- Under the Uniform Practice Code, regular way transactions for common stock settle on
- The same day as the trade date
- The first business day following the trade date
- The second business day following the trade date
- The second business day following the settlement date
Correct answer: The second business day following the trade date
Under the Uniform Practice Code, regular way trades settle two business days after the trade date (T+2). Cash settlement for a trade occurs on the same day as the trade date.
- Each of the following situations represents a potential violation by a registered representative except
- Recommending a municipal bond investment over a corporate bond without knowing the client's tax status
- Disclosing material information about an investment to a client
- Recommending investments to be purchased in a joint account while having suitability information on only one of the owners
- Recommending a specific investment to a seminar audience of prospective clients
Correct answer: Disclosing material information about an investment to a client
Disclosing material information about an investment is a registered representative's responsibility. Beyond that, recommendations must be tailored to meet the needs of individual customers.
- When a brokerage firm acts as a principal in a transaction with a customer it is acting as
- A broker
- An agent
- An agency
- A dealer
Correct answer: A dealer
When acting as a principal in a transaction, a BD is acting as a dealer, buying or selling out of its own inventory.
- Under federal law, which act regulates the activities of broker-dealers and associated persons?
- Trust Indenture Act of 1939
- Uniform Securities Act
- Securities Exchange Act of 1934
- Investment Company Act of 1940
Correct answer: Securities Exchange Act of 1934
The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.
- Under the Conduct Rules, all of the following actions violate fair and ethical treatment of customers except
- Assuring a customer that, because dollar cost averaging is one of the most effective means of investing for the long term, his account is unlikely to suffer any losses
- Recommending that a customer regularly move his assets among several fund families with similar investment objectives to ensure diversification and top performance
- Recommending that a customer set up a scheduled investment program, depositing the same amount each period regardless of market value
- Encouraging customers to purchase mutual fund shares just before the ex-date to ensure that the customer receives the upcoming dividend
Correct answer: Recommending that a customer set up a scheduled investment program, depositing the same amount each period regardless of market value
Encouraging a customer to invest according to a schedule is perfectly lawful.
- For a nonexempt security, Regulation T requires payment to be made in how many business days after regular way settlement?
- Two days
- Varies from state to state
- One day
- Regulation T and regular way are the same
Correct answer: Two days
Regular way settlement is trade date plus two business days. Regulation T requires payment no more than two business days later.
- Which of the following statements regarding the Securities Exchange Act of 1934 is not true?
- It requires registration of broker-dealers with the SEC.
- It provides for regulation of the over-the-counter market.
- It requires registration of securities.
- It prohibits unequitable and unfair trade practices.
Correct answer: It requires registration of securities.
To prevent manipulative and deceptive practices in the secondary markets, the Act of 1934 (the people act) requires registration of people and exchanges transacting securities business.
- Cash settlement for a trade in a customer's account must settle
- Three business days after the trade
- Five business days after the trade
- The day of the trade
- The next business day following the trade
Correct answer: The day of the trade
Cash settlement occurs on the day of the trade.
- During the course of a routine examination of your member firm, FINRA has requested copies of books and records regarding transactions of a particular client. You and your member firm
- Must comply only if accompanied by a court order
- Must provide all copies of the books and records requested
- Are not required to provide books and records regarding a particular client during routine examinations, but only financial data on the firm
- Do not have to provide the information because this is a routine examination and not an investigation of a complaint
Correct answer: Must provide all copies of the books and records requested
For the purpose of a routine examination, investigation of a complaint, or any proceeding by FINRA, no member firm or any associated person may fail to provide information or to permit inspection of books, records, or any account documentation. A court order is not required.
- The over-the-counter market could be characterized as what type of market?
- Primary market
- First
- Auction
- Dealer
Correct answer: Dealer
The OTC market is an interdealer market.
- An individual or firm that charges a fee for executing transactions on behalf of its customers is called what?
- Broker
- Dealer
- Market maker
- Principal
Correct answer: Broker
A broker (agent, agency) is an individual or firm that charges a fee for executing transactions on behalf of its customers, as opposed to holding an inventory of the security and trading into and out of its own inventory.
- Which regulatory organization administers the Series 6 examination?
- FINRA
- The SEC
- The Federal Reserve
- The MSRB
Correct answer: FINRA
The Series 6 (Investment Company and Variable Contracts Products Representative) exam is administered by FINRA. The SEC oversees FINRA but does not administer the exam.
- A Series 6 registration permits a representative to sell which of the following products?
- Mutual funds and variable annuities
- Individual common stocks
- Municipal bonds
- Options contracts
Correct answer: Mutual funds and variable annuities
The Series 6 covers packaged investment products — mutual funds, variable annuities, and variable life insurance. Selling individual stocks, bonds, or options requires a Series 7.
- Before taking the Series 6 exam, a candidate must typically pass which co-requisite exam?
- The SIE (Securities Industry Essentials) exam
- The Series 63 exam
- The Series 7 exam
- The Series 24 exam
Correct answer: The SIE (Securities Industry Essentials) exam
Since 2018, candidates must pass both the SIE and the Series 6 top-off exam to qualify. The Series 63 is a separate state-law exam often taken alongside, but it is not a prerequisite for the Series 6 itself.
- What is the passing score for the Series 6 top-off examination?
Correct answer: 70%
The Series 6 requires a score of 70% to pass. The exam contains 50 scored questions; candidates must answer at least 35 correctly.
- Under FINRA rules, how long must a candidate wait to retake the Series 6 after a third failed attempt?
- 180 days
- 30 days
- 90 days
- There is no waiting period
Correct answer: 180 days
FINRA imposes a 30-day wait after the first and second failures, and a 180-day wait after a third (or subsequent) failure before a candidate may retest.
- Your client has a solid financial foundation, has additional discretionary income to invest, is bullish, and is willing to accept the higher risks that come with the potential for higher rewards. Which of the following might you recommend?
- Sector funds
- Value funds
- Long put options
- Asset allocation funds
Correct answer: Sector funds
Sector funds offer higher risk and potential for higher rewards because they concentrate on particular economic sectors or geographic areas. Long puts are bearish, and both value and asset allocation funds are more suited for conservative investors.
- The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?
- Aerospace
- Public utilities
- Consumer appliances
- Computer technology
Correct answer: Public utilities
Utilities are defensive industries; they tend to pay dividends consistently.
- An investment company portfolio manager who switches among investment classes based on anticipated market changes is using a technique known as
- Dollar cost averaging
- Value investing
- Asset allocation
- Indexing
Correct answer: Asset allocation
Changing asset classes in response to market conditions is the technique of allocating one's assets to take advantage of possible opportunities.
- An investor purchased a variable annuity some years ago and has been making regular payments into it. He has encountered financial difficulties and asks his registered representative if he can arrange to delay his next few payments. The registered representative explains that
- The customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty
- The customer should exchange his annuity for a variable life insurance contract under Section 1035 to avoid tax consequences
- If he starts missing payments, there will be penalties
- If he cannot meet his commitments, he should not have invested in the first place
Correct answer: The customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty
A variable annuity does not require scheduled premium payments. The customer may miss as many payments as he wishes with no fear of forfeiting earlier payments.
- An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is
- The yield is always higher than mortgage yields
- The safety of the principal invested
- Changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices
- The yield is always higher than bond yields
Correct answer: Changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices
Because common stocks are not fixed-dollar investments, they have the opportunity to keep pace with inflation.
- Your open-end investment company customer has decided to take automatic reinvestment of dividends and capital gains distributions. This choice will
- Increase the taxes on these distributions
- Lower the taxes on these distributions
- Defer the taxes on these distributions
- Not alter the tax due on the distributions
Correct answer: Not alter the tax due on the distributions
Automatic reinvestment of dividends and gains does not increase, decrease, or defer tax liability.
- An investor sells EGH common stock that she has owned for six months at a loss of $2,500 on February 16. Two weeks later, she purchases preemptive rights to EGH common stock at a price of $1.50, exercisable at a price of $35. Which of the following best describes the tax treatment of this transaction?
- By purchasing the rights, the investor reduces the cost basis of the shares sold at a loss by the full purchase price of the rights. The losses incurred are, therefore, reduced by the purchase price of the rights.
- The purchase of the rights, according to IRS rules, increases the cost basis of the shares sold at a loss and allows for a greater write-off on the current year's taxes. The maximum, however, is $3,000 in net losses.
- The purchase of the rights, according to IRS rules, represents the reestablishment of the investor's position in substantially identical securities, and any potential losses will be disallowed under wash sale rules.
- The purchase of the rights reduces the cost basis in the stock acquired. The investor may write off the full $2,500 loss on the current year's tax return.
Correct answer: The purchase of the rights, according to IRS rules, represents the reestablishment of the investor's position in substantially identical securities, and any potential losses will be disallowed under wash sale rules.
IRS rules do not allow an investor to claim a tax loss from the sale of securities if the investor effectively reestablishes her position within 30 days before or after the sale. Because rights allow the purchase of the same stock, the investor has created a wash sale and any loss is disallowed.
- If your customer sells, for a profit, a stock they have held for three years they will have
- A short-term gain
- A long-term loss
- A long-term gain
- A short-term loss
Correct answer: A long-term gain
A position sold for a profit that is held for more than 12 months will generate a long-term capital gain.
- One of the most important functions of a registered representative is to do which of the following?
- Recommend proprietary investments of the broker-dealer
- Suggest investments with the highest overall payout to the broker-dealer
- Select investments to meet the customer's needs
- Recommend only investments that do not decline in value
Correct answer: Select investments to meet the customer's needs
The function of a registered representative is to select investments that meet the customer's needs, not what is best for the broker-dealer. There is some risk of loss in all investments.
- Those industries that are least affected by normal business cycles are
- Defensive industries
- Special situation
- Cyclical industries
- Growth industries
Correct answer: Defensive industries
Defensive industries are least affected by normal business cycles. Companies in defensive industries produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco, or supply essential services such as those offered by utility companies. Public consumption of such goods remains fairly steady throughout the business cycle.
- A couple in their early 30s has been married for four years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about six months, which of the following mutual funds is the most suitable for these customers?
- ATF Capital Appreciation Fund
- LMN Cash Reserves Money Market Fund
- ABC Growth & Income Fund
- XYZ Investment-Grade Bond Fund
Correct answer: LMN Cash Reserves Money Market Fund
These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective.
- A customer wishes to open a new account but refuses to provide suitability information. Under FINRA rules, the member
- Must not open the account
- May open the account but must limit recommendations to U.S. government securities.
- May open the account but may not make any recommendations
- May open the account but must limit recommendations to investment-grade securities
Correct answer: May open the account but may not make any recommendations
If a customer fails to provide suitability information, the account may be opened but the member may not make any recommendations.
- All of the following information would be helpful to have in a customer profile except
- Mortgage balance
- Previous investment experience
- Educational achievement of a bachelor's degree from an accredited college
- Amount of life insurance owned
Correct answer: Educational achievement of a bachelor's degree from an accredited college
The customer's degree and school attended will have the smallest impact on your recommendations of all the choices offered.
- 12b-1 fees may be used to pay all of the following except
- Mailing expenses
- Commissions on portfolio securities transactions
- Prospectus printing costs
- Advertising costs
Correct answer: Commissions on portfolio securities transactions
12b-1 fees cover advertising costs, mailing expenses, and prospectus printing costs. Portfolio transactions are defrayed from the management fee.
- An investment company that is not classified as either a unit investment trust or a face-amount certificate company would be classified as
- An ETF
- A non-fixed portfolio trust
- A fixed portfolio trust
- A management investment company
Correct answer: A management investment company
Management investment companies are one of the three classifications of investment companies under the Investment Company Act of 1940. The other two are face-amount certificate companies and unit investment trusts, the latter of which can have a fixed or non-fixed portfolio.
- The AIR (assumed interest rate) for your customer's variable annuity contract is 5%. In February, the separate account earned 7%. In March, the separate account earns 5%. The April annuity payment will be
- Equal to the original payment amount at the time of annuitization
- Equal to the March payment
- Lower than the March payment
- Higher than the March payment
Correct answer: Equal to the March payment
When the separate account return is equal to the AIR, the next month's payment amount does not change.
- The main benefit that variable life insurance has over whole life insurance is
- The potential for a higher cash value and death benefit
- A lower sales charge
- The availability of policy loans
- An adjustable premium
Correct answer: The potential for a higher cash value and death benefit
Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy.
- A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal?
- $16,000
- $10,000
- $6,000
- None, because annuity was nonqualified
Correct answer: $6,000
Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.
- A shareholder has redeemed some mutual fund shares that were purchased over a period of 10 years. If the shareholder has not indicated the specific dates of purchase and cost of the shares that were redeemed on his tax return, the IRS will follow which of the following methods in determining the cost basis of shares redeemed?
- FIFO
- Step-up in basis
- Average cost of purchase
- LIFO
Correct answer: FIFO
If another method is not chosen, the IRS will assume the FIFO (first in, first out) method of accounting in determining the cost basis of the shares redeemed. Investors may choose to identify shares redeemed only if the cost of the shares and the date of purchase is recorded on the tax return. The average cost method is an alternative that a taxpayer can use continuously for a given investment.
- In the prior year, your customer realized a $17,000 short-term capital loss and a $6,000 long-term capital gain. What are the tax results of these transactions?
- An $11,000 short-term gain
- An $11,000 in carry forward losses
- A $3,000 reduction in income and $11,000 in carry forward losses
- A $3,000 reduction in income and $8,000 in carry forward losses
Correct answer: A $3,000 reduction in income and $8,000 in carry forward losses
The customer netted $11,000 in losses, of which $3,000 may be used to reduce income and $8,000 may be carried forward into the following years.
- Which of the following does not require the delivery of a specific disclosure regarding liquidity or the option disclosure document?
- Hedge funds
- Option income fund
- Options
- Limited partnerships
Correct answer: Option income fund
An option income fund is a type of mutual fund and requires no special disclosure beyond those required for a mutual fund (a prospectus).
- Examining a customer's current investment holdings may help with which of the following tasks?
- All of these
- Identifying a customer's investment experience
- Identifying the customer's risk tolerance
- Understanding what type of securities may be needed for the customer to reach their goals
Correct answer: All of these
All of these parts of suitability may be informed by taking a good look at a customer's current investment mix.
- Certain investments require special disclosures. Among the special disclosures associated with a limited partnership (LP) are
- That LPs are very difficult to liquidate
- That LPs are often listed on exchanges
- That LPs trade like mutual funds
- That LPs entail investment risk
Correct answer: That LPs are very difficult to liquidate
LPs are very difficult to liquidate, and this disclosure needs to be made clear. That investments entail risk, and the specific risks, need to be disclosed, but this is true for all investments and is hardly special. LPs do not trade on the secondary market, so the statements regarding trading or listing are false.
- Your married customers, both 34 years old, have one daughter, age 4. They want to begin accumulating the money required to send their daughter to one of the nation's top universities in 14 years. In addition, they have not yet begun to accumulate money for their retirement. Which of the following mutual funds is the most suitable for these customers?
- ATF Capital Appreciation Fund
- NavCo Cash Reserves Money Market Fund
- LMN Government Income Fund
- NavCo Growth & Income Fund
Correct answer: ATF Capital Appreciation Fund
These customers require maximum capital appreciation. Their long-term time frame allows them to ride out the stock market fluctuations. The best investment for them is the stock mutual fund that concentrates solely on achieving long-term growth rather than generating current income.
- A retiree, widowed and in his early 70s, has adequate savings to meet large unexpected expenses. However, he has no pension or IRA, and in some months Social Security payments leave him short, requiring him to dip into his savings and investments for recurring expenses such as his mortgage payment and utilities. With an already diversified portfolio, he wishes there could be a way to add to his monthly income on a regular basis. He's willing to liquidate and allocate up to $100,000 of his current portfolio or cash out a life insurance policy if need be to meet this objective. Which of the following recommendations would be better?
- A variable annuity
- Growth and income fund
- Ginnie Mae's (GNMA) mutual fund
- Fixed annuity
Correct answer: Ginnie Mae's (GNMA) mutual fund
With monthly income being the objective, GNMAs would be deemed more suitable and should become a part of his existing portfolio. Each month, GNMA certificates pass through a portion of one's principal and interest lending themselves to monthly income. While an annuity also makes monthly payments to annuitants, they are generally not deemed suitable unless all other retirement vehicle investments have been utilized first. Additionally, liquidating assets to purchase a VA, or cashing out life insurance policies to do so, is almost always deemed unsuitable.
- An investor purchases a variable annuity. The investment risk in the separate account is borne by whom?
- The investor (contract owner)
- The insurance company
- FINRA
- The fund's board of directors
Correct answer: The investor (contract owner)
In a variable annuity, separate-account assets are invested in subaccounts and the contract owner bears the investment risk — unlike a fixed annuity, where the insurer guarantees the return.
- Under the Investment Company Act of 1940, an open-end fund must redeem shares within how many days of a request?
- 7 days
- 3 days
- 30 days
- 10 business days
Correct answer: 7 days
The Investment Company Act of 1940 requires open-end funds (mutual funds) to redeem shares at NAV within seven days of receiving a redemption request.
- A mutual fund's sales charge is calculated as a percentage of which figure?
- The public offering price (POP)
- The net asset value (NAV)
- The redemption price
- The expense ratio
Correct answer: The public offering price (POP)
FINRA rules express the maximum sales charge as a percentage of the POP. POP = NAV + sales charge.
- Which document must be delivered to a customer no later than at the time of sale of a mutual fund?
- The prospectus
- The statement of additional information
- The annual report
- Form ADV
Correct answer: The prospectus
A prospectus must be delivered no later than the completion of the transaction (the time of sale).
