FINRA Series 6 — All Questions

A fund with $400 million of average net assets reports $4.4 million of operating expenses for the year. What is its expense ratio?

• a.1.10%✓
• b.4.40%
• c.0.11%
• d.11.0%

The expense ratio is expenses divided by average net assets: $4.4 million over $400 million is 1.10%. The 0.11% and 11.0% results misplace the decimal. The 4.40% result divides by only $100 million instead of $400 million.Fund expense analysis

A fund's NAV rose from $25.00 to $26.50 during the year, and it paid $0.60 in dividends and $0.40 in capital gain distributions. What is the total return, assuming no reinvestment?

• a.10.0%✓
• b.8.4%
• c.6.0%
• d.4.0%

Total return adds the NAV change of $1.50 to the $1.00 of distributions, giving $2.50 over a starting NAV of $25.00, or 10.0%. The NAV change alone gives 6.0%. Leaving out the capital gains gives 8.4%. A figure of 4.0% counts only the distributions.Total return

How is a fund's standardized SEC yield calculated?

• a.Net income earned over the latest 30 days, after expenses, annualized✓
• b.Distributions paid over the last twelve months divided by the current offering price
• c.The latest quarter's total return multiplied by four
• d.Dividends paid over the latest seven days divided by the sales charge, annualized

The standardized yield uses income earned in the most recent 30 days, after expenses, annualized, which makes funds comparable. Distributions over a year are a distribution rate and not the standard yield. Annualizing a quarter's total return mixes in price changes. A seven-day period belongs to money market funds, and the sales charge is not a denominator.SEC Form N-1A; Rule 482

A customer wants to invest $48,000 in a front-end load fund whose sales charge falls at $50,000. What should the representative do?

• a.Disclose the breakpoint and explain how a letter of intent can reach it✓
• b.Process the order as written because the customer chose the amount
• c.Advise buying $48,000 now and waiting a full year before adding any more
• d.Suggest splitting the order across two fund families to keep each below $50,000

Rule 2342 prohibits selling just below a breakpoint, so the representative must disclose the discount available at $50,000 and how a letter of intent or a small increase captures it. Processing without disclosure deprives the customer of the discount. Splitting between families defeats the aggregation. Waiting a year gives up the lower charge and treats the customer's amount as fixed.FINRA Rule 2342

Which test defines a diversified management company?

• a.All assets spread equally among at least ten issuers, each capped at 10% of assets
• b.At least 40% of assets in government securities, with no limit on any one issuer
• c.At least 50% of assets in a single industry, with no limit on any one issuer
• d.75% of assets with a cap of 5% per issuer and 10% of voting stock✓

A diversified company must hold at least 75% of total assets in cash, government securities, other investment companies and other securities, with each issuer limited to 5% of the fund's assets and 10% of the issuer's voting securities. Concentrating half the assets in one industry is the opposite of diversification. Equal weighting among ten issuers is not the statutory test. A large government securities position does not lift the limits on other holdings.Investment Company Act Section 5(b)(1)

To be taxed as a regulated investment company, a fund must generally distribute at least what portion of its investment company taxable income?

• a.100%
• b.50%
• c.75%
• d.90%✓

A fund qualifies for pass-through treatment by distributing at least 90% of its investment company taxable income, and any amount retained is taxed at the fund level. 50% and 75% fall below the requirement. The rule does not demand 100%, although distributing less than that leaves the retained portion taxable.IRC Section 852(a)

An investor buys 500 fund shares at $20 just before the fund pays a $1.00 per share capital gain distribution. What is the result?

• a.He owes tax on $500, and the NAV drops by about $1.00 a share✓
• b.He owes no tax because the shares were just purchased
• c.He owes tax on $500, but the NAV stays at $20 per share
• d.He owes tax only when he later sells the shares at a gain

Capital gain distributions go to whoever holds shares on the record date, so he is taxed on $500 even though the gains built up before he bought. The NAV falls by roughly the distribution. A recent purchase does not avoid the tax. NAV staying put contradicts how distributions work. Deferral until sale applies only to unrealized gains.Tax considerations of year-end purchases

A 78-year-old retiree needs access to her money for living costs and asks about a variable annuity with an 8-year surrender schedule. What concern should the representative raise?

• a.Death benefits end once the owner passes age 75, by law
• b.Surrender charges could restrict her access to cash✓
• c.The annuity would lose its tax deferral once the owner reaches age 78
• d.Variable annuities cannot be sold to anyone over 75 under FINRA rules

Surrender charges that last for years conflict with a short time horizon and a need for liquidity, which makes the product a poor match. Tax deferral does not end at a given age. No age cap bars the sale, although age is a factor in suitability. Death benefits are not generally terminated at age 75.FINRA Rule 2111; Regulation Best Interest

A customer proposes to buy a variable annuity inside her IRA mainly for tax deferral. What should the representative point out?

• a.The annual IRA contribution limit rises when the contract is bought inside it
• b.The IRA already defers tax, so extra cost needs another reason✓
• c.The annuity doubles the tax deferral that the IRA already provides
• d.The annuity makes withdrawals from the IRA tax-free

An IRA already defers tax, so the annuity adds expense without adding deferral; only features such as guarantees can justify the cost. The deferral is not doubled. The annuity does not raise the contribution limit. Withdrawals from a traditional IRA stay taxable regardless of the wrapper.Variable annuity in a retirement account

A 62-year-old made her first Roth IRA contribution three years ago and now withdraws the earnings. How is the withdrawal taxed?

• a.Earnings are taxable, with no 10% additional tax at her age✓
• b.Taxable, plus a 10% additional tax on the earnings withdrawn
• c.Tax-free, because she is over 59 1/2 and made the contribution years ago
• d.Tax-free, because her contributions were made from after-tax income

A qualified distribution requires both the five-year period and age 59 1/2 or another event, and she has only three years, so the earnings are taxable. The 10% additional tax applies only before age 59 1/2. Age alone does not make the distribution tax-free. Contributions are after-tax, but the earnings are not.IRC Section 408A(d)

A customer converts $40,000 from a Traditional IRA of fully pretax money to a Roth IRA. What is the tax result for the year of conversion?

• a.The full $40,000 is added to her ordinary income✓
• b.The $40,000 is taxed, plus an additional 10% tax
• c.Only the earnings are taxed at capital gains rates
• d.Nothing is taxed until she withdraws from the Roth

A conversion of pretax money is included in income in the year converted, so $40,000 is taxable at ordinary rates. Deferral until withdrawal describes a Traditional IRA, not a conversion. Capital gains rates are never used. The 10% additional tax does not apply to a conversion because no early distribution occurs.IRC Section 408A(d)(3)

A single filer has modified adjusted gross income of $230,000, including $50,000 of net investment income. The threshold is $200,000. What is the net investment income tax at 3.8%?

• a.$1,900
• b.$1,140✓
• c.$8,740
• d.$11,400

The tax applies to the lesser of net investment income ($50,000) or the excess of income over the threshold ($30,000), so 3.8% of $30,000 is $1,140. Using $50,000 gives $1,900, which ignores the threshold limit. $11,400 misplaces the decimal. $8,740 taxes the full $230,000 income.IRC Section 1411

A variable annuity payout is based on a 4% assumed interest rate, and the separate account returns 7% for the year. What happens to the annuity unit payment?

• a.It decreases because returns exceeded the assumed rate
• b.It stays the same because payments are guaranteed
• c.It converts to a fixed payment
• d.It increases for the next period✓

When the separate account earns more than the assumed interest rate, the annuity unit value and the payment rise. A flat payment describes a fixed annuity. A drop would occur if the return were below the rate. The payout does not convert to a fixed type on its own.Variable annuity payout; assumed interest rate

A fund with $200 million in average assets bought $75 million and sold $60 million of securities during the year. What is the turnover ratio?

• a.30%✓
• b.67.5%
• c.7.5%
• d.37.5%

Turnover is the lesser of purchases or sales divided by average net assets: $60 million over $200 million is 30%. Using purchases gives 37.5%. Adding purchases and sales gives 67.5%. The 7.5% figure uses only the $15 million difference between purchases and sales.Portfolio turnover

A registered representative sends a tailored email about a corporate bond to 9 retail customers during one 30-day period. What does Rule 2210 require of the firm for this message?

• a.No review at all, because messages to 25 or fewer customers fall outside this rule's reach
• b.Filing with FINRA's Advertising Regulation Department within 10 business days after the message is first used
• c.Supervision and review under its correspondence procedures, not principal approval before first use✓
• d.Principal approval before first use, exactly as for any written message the firm sends to retail customers

Written communications to 25 or fewer retail investors in 30 days are correspondence, and correspondence is subject to the supervision and review requirements of Rule 3110(b) rather than the pre-use principal approval that applies to retail communications. The pre-use approval answer describes retail communications (more than 25 recipients). The 10-business-day post-use filing is a filing duty for certain fund communications, and correspondence is excluded from filing. The 25-recipient line separates correspondence from retail communications, but correspondence is still supervised.FINRA Rule 2210(a)(2), (b)(2)

A firm will file a retail communication with FINRA's Advertising Regulation Department on March 3 and will first use it on April 14. By when must a registered principal approve it?

• a.Within 10 business days after March 3, once the Department has returned its comments
• b.At any time before the Department finishes its review of the March 3 filing
• c.Before the March 3 filing, because approval comes before the earlier of use or filing✓
• d.Before April 14, the first-use date, since first use is the event that triggers approval

An appropriately qualified registered principal must approve a retail communication before the earlier of its use or its filing with the Department, and a principal must approve a communication before the member files it. Filing on March 3 comes before use on April 14, so approval is due first. Waiting until first use ignores the filing date. Approval after the Department's comments reverses the order, since the principal approves what is filed. Approval at any point during FINRA's review also comes too late.FINRA Rule 2210(b)(1)(A), (b)(1)(F)

A broker-dealer's FINRA membership became effective seven months ago. It wants to publish a retail communication on its public website. When must it file the piece with FINRA?

• a.Not at all, because the piece promotes no registered investment company or security future
• b.At least 10 business days before first use, since it is in its first year of membership✓
• c.Only if FINRA requests it in a spot check of the firm's communications in the coming year
• d.Within 10 business days after first use, the period for communications about registered funds

For one year from the date FINRA membership became effective, a new member must file any retail communication used in public media, including a generally accessible website, at least 10 business days before first use. The post-use 10-business-day period belongs to fund-family and certain product communications. A spot check is an extra tool and does not replace the new-member filing duty. The absence of fund or security-futures content matters for other filing rules but does not excuse a first-year member.FINRA Rule 2210(c)(1)(A)

Last quarter a firm filed a mutual fund retail communication. This quarter it reuses the layout and changes only the performance figures, the holdings table, and a paragraph recapping market events during the period. Must it be filed again?

• a.No, because fund communications are never filed once the fund's prospectus is on file with the SEC
• b.Yes, at least 10 business days before first use, because the market recap is new narrative text
• c.No, because updated statistics and non-predictive narrative are the only changes to a previously filed template✓
• d.Yes, within 10 business days of first use, because every new performance figure is a new communication

Retail communications based on a template that was previously filed are excluded from the filing requirements when the changes are limited to updated statistical or other non-narrative information and non-predictive narrative describing market events in the period or factual portfolio changes. New performance figures and a factual market recap fit that exclusion. Treating each new figure as a new filing ignores the template exclusion. The pre-use timing applies only to the narrower categories in the rule. A fund prospectus on file does not remove the filing duty for other fund communications.FINRA Rule 2210(c)(7)(B)

A firm mails 300 unaltered copies of a magazine article praising a fund family it sells. An unaffiliated publisher wrote it independently, and neither the firm nor the funds commissioned it. What is the filing result?

• a.It must be filed at least 10 business days before use because it praises a specific fund
• b.It must be filed within 10 business days of first use because it promotes a fund family
• c.It must be filed only if the article quotes performance figures for the funds
• d.Filing is excluded because the piece is an independently prepared reprint✓

A reprint or excerpt of an article issued by a publisher is excluded from filing when the publisher is not an affiliate of the member or of an issuer or underwriter of a security mentioned, nobody commissioned the article, and the member has not materially altered it. The fund-family and specific-fund filing rules therefore do not reach it. Quoted performance figures do not create a filing duty for a qualifying reprint either. If the firm paid for the article or edited its content, the exclusion would be lost.FINRA Rule 2210(c)(7)(I)

A seminar handout shows how $10,000 grows at assumed annual rates of 4%, 6% and 8% to explain compounding. It names no security and states that the rates are not predictions. Under Rule 2210, the handout is:

• a.Permitted only if the firm files it with FINRA at least 10 business days before first use
• b.Permitted only if the highest assumed rate matches the long-run average return of the stock market
• c.Permitted as a hypothetical illustration of a mathematical principle that predicts nothing about an investment✓
• d.Prohibited, because every assumed rate of return is treated as a projection of how some investment will perform

Rule 2210 bars predictions or projections of performance but does not prohibit a hypothetical illustration of mathematical principles, provided it does not predict or project the performance of an investment or strategy. Compounding at assumed rates with no product named fits that exception. Calling every assumed rate a projection ignores the exception. The rule sets no requirement that assumed rates track a market average. No pre-use filing is triggered by this kind of illustration alone.FINRA Rule 2210(d)(1)(F)(i)

A print ad headlines a fund's 9% yield in 36-point type. A footnote in 6-point type says the yield includes a return of capital and may not be sustainable. What is wrong with the ad?

• a.The footnote is acceptable because it sits on the same page as the headline claim
• b.Nothing needs to change once a principal has approved the footnote wording as accurate and complete
• c.Footnotes are banned in all retail communications, so the qualifying text has to be deleted from the ad
• d.A footnote cannot limit the headline when that placement inhibits the investor's understanding✓

Information may be placed in a legend or footnote only if the placement would not inhibit an investor's understanding of the communication. A tiny footnote that undercuts a large headline yield does exactly that. Footnotes are not banned outright. Being on the same page does not cure the contrast in prominence. Principal approval is required for retail communications but does not make a misleading layout acceptable.FINRA Rule 2210(d)(1)(C)

A bond fund flyer shows a 5.4% 30-day yield in bold type and never mentions that the fund's share price falls when interest rates rise. What must the firm do before using it?

• a.Remove the yield from the flyer, since a yield may never be emphasized in bold type
• b.Leave it as written, since an accurate yield figure satisfies the content standards by itself
• c.File it with FINRA at least 10 business days before use, which cures the omission
• d.Add the interest-rate risk, as omitting a material qualification is misleading✓

Communications must be fair and balanced, may not omit a material fact or qualification that makes them misleading, and must treat risks and benefits in balance, including the risk of fluctuating prices. A flyer that touts yield and hides interest-rate risk fails that test even if the yield is accurate. A yield can be shown, subject to the performance rules, so deleting it is not the remedy. Filing is a separate duty and does not repair content.FINRA Rule 2210(d)(1)(A), (d)(1)(D)

A flyer compares a bond mutual fund's 4.8% yield with a bank certificate of deposit's 4.1% rate and says nothing else about either. What must the comparison disclose?

• a.The reader's likely tax bracket, since comparisons must be shown after tax
• b.All material differences, including safety, insurance, liquidity and fluctuation of principal✓
• c.Only the difference in yield, since yield is the sole figure being compared
• d.Only the fund's sales charge, since costs are the one required difference

Any comparison of investments in a retail communication must disclose all material differences between them, as applicable including objectives, costs, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features. A fund's price can fall and it is not FDIC-insured, while a CD is insured and has a fixed return. Limiting the disclosure to yield or to sales charges leaves out the other material differences. The rule does not require an after-tax comparison.FINRA Rule 2210(d)(2)

A firm plans to send the same dense, jargon-heavy brochure on a covered-call strategy to retirees who have never traded options. What must the firm consider under Rule 2210?

• a.Whether the readers have signed an options agreement, which would reclassify the brochure as correspondence
• b.The nature of the audience, supplying details and explanations suited to the readers who will receive it✓
• c.Nothing beyond accuracy, because the content standards apply identically to every reader
• d.The readers' ages alone, since the rule sets a separate content standard for seniors

Members must consider the nature of the audience to which a communication is directed and provide details and explanations appropriate to it. A brochure written for experienced traders does not meet that standard for first-time options readers. Accuracy is necessary but the audience duty is separate. Classification as correspondence depends on the number of retail recipients, not on options paperwork. The rule contains no separate age-based standard.FINRA Rule 2210(d)(1)(E)

Which retail communication is not required to prominently disclose the name of the member?

• a.A brochure that also names the firm's insurance affiliate
• b.A blind advertisement used to recruit personnel✓
• c.A web page promoting a mutual fund the firm underwrites
• d.A radio spot announcing the firm's investment seminar

Retail communications and correspondence must prominently disclose the member's name, and if they name any non-member or individual, they must describe that person's relationship with the member. The only carve-out is for so-called blind advertisements used to recruit personnel. Fund promotion, seminar announcements and brochures naming an affiliate all must show the member.FINRA Rule 2210(d)(3)

A firm pays a customer $150 to appear in a video praising the firm's investment advice. Besides saying the testimonial may not be representative and is no guarantee of future success, what must the video disclose?

• a.That the customer's returns for the period were higher than the firm's average client
• b.That the testimonial is paid, because more than $100 in value was given for it✓
• c.Nothing more, because payment disclosure is required only when the amount paid exceeds $500
• d.That the customer holds a financial interest in the firm's own securities

A testimonial about a member's investment advice or performance must prominently disclose that it may not be representative of other customers' experience, that it is no guarantee of future success, and, if more than $100 in value was paid for it, that it is a paid testimonial. The $150 payment crosses the $100 line. The $500 figure is wrong. The rule does not require comparing the customer's returns with the firm's average, and it does not require disclosing a financial interest in the firm.FINRA Rule 2210(d)(6)(B)

A flyer says, 'Last year we told clients to buy Zeta Corp at $20; it now trades at $31.' What would make a reference to a past profitable recommendation permissible?

• a.Adding a line that past performance does not guarantee future results, which cures the claim
• b.Setting out or offering a list of all similar recommendations from the prior year, with the legend✓
• c.Principal approval of the flyer with a file copy of the supporting price data
• d.Listing the three best recommendations of the past year beside the same cautionary legend

A retail communication may not refer to past specific recommendations that were or would have been profitable, unless it sets out or offers to furnish a list of all recommendations of the same type, kind, grade or classification made within the preceding period of at least one year, with name, date, nature, prices, and the legend that it should not be assumed future recommendations will be profitable. A generic disclaimer, a cherry-picked list, or internal approval alone does not meet that condition.FINRA Rule 2210(d)(7)(C)

At an unscripted public seminar, a representative hands out slides and recommends a stock in which he holds a non-nominal position. What does Rule 2210 require?

• a.Only disclosure of his position, since a seminar is exempt from the reasonable-basis standard that applies elsewhere
• b.Principal approval of his spoken remarks before he delivers them, as with any other retail communication
• c.Nothing, because unscripted remarks fall outside the content standards of this rule entirely
• d.A reasonable basis, disclosure of his financial interest, and treating the slides as communications✓

A public appearance must follow the general content standards, a recommendation in one needs a reasonable basis, and the associated person must disclose a non-nominal financial interest in the recommended issuer and other material conflicts. Scripts, slides and handouts are communications judged by their audience, content and use. Unscripted remarks are not exempt, and the rule requires written supervisory procedures for appearances rather than principal pre-approval of spoken words.FINRA Rule 2210(f)

A variable annuity brochure says its investment options 'are the mutual funds you already know, just held inside an insurance contract.' What does Rule 2211 say about this presentation?

• a.It is improper, because the piece must not imply that the product or its underlying account is a mutual fund✓
• b.It is proper, because the brochure also uses the product's proprietary name in its opening paragraph
• c.It is proper, because the subaccounts invest in mutual funds, which makes the product a mutual fund in substance
• d.It is improper only because annuity brochures may not mention mutual funds in any context at all

Communications about variable annuities and variable life must clearly describe the product as such, and considering the significant differences between mutual funds and variable products, may not represent or imply that the product or its underlying account is a mutual fund. Investing through funds does not turn the contract into one. A proprietary name may be added to the product description but does not permit the mutual fund comparison. The rule does not ban all mention of mutual funds.FINRA Rule 2211(a)(1)

A variable annuity ad says, 'Your money is always available: withdraw whenever you need it.' What must the ad do under Rule 2211?

• a.Limit the claim to owners past age 59 and a half, because they face no tax penalty or surrender charge
• b.Replace the claim with a statement that withdrawals are guaranteed by the insurance company's assets
• c.Nothing, because annuity contract values are as liquid as a savings account, so the claim is accurate
• d.Balance it with clear language on surrender charges, tax penalties and possible loss of principal✓

Because variable annuities and variable life often carry substantial charges or tax penalties for early withdrawal, there must be no representation or implication that they are short-term, liquid investments, and any presentation about access to values must be balanced by clear language on the negative impact of early redemptions such as contingent deferred sales loads and tax penalties and the possibility of receiving less than the amount invested. An insurer's guarantee does not make separate account withdrawals risk-free, and an age limit does not remove the surrender charge.FINRA Rule 2211(a)(2)

A variable life insurance ad says, 'Our insurer holds an A++ financial-strength rating, so every dollar in your policy's investment accounts is protected.' What is the problem?

• a.The problem is cured if the ad names the rating agency and the date of the rating it quotes
• b.The rating may be mentioned only in communications that are sent to institutional investors
• c.The insurer's guarantees and ratings may not be presented as covering the separate account's value or return✓
• d.There is no problem, because the insurer's rating stands behind every value credited in the policy

An insurer's guarantees, such as a minimum death benefit or a fixed account, depend on its claims-paying ability and must not be overemphasized. There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account, or that the insurer's financial rating applies to the separate account. Naming the rating agency does not change that. The rule contains no institutional-only limit on citing a rating.FINRA Rule 2211(a)(3)

A firm's variable life illustration shows assumed gross returns of 4%, 8% and 14%. What does Rule 2211 say about it?

• a.It exceeds the 12% gross ceiling and also leaves out the required 0% gross return✓
• b.It is acceptable, since the highest assumed rate may be any figure the firm calls reasonable
• c.It lacks the required 0% rate only, because gross rates may be as high as 15%
• d.It breaks the 12% gross ceiling only, because a 0% rate is optional in an illustration

A variable life illustration may use any combination of assumed gross returns up to and including 12%, and one of the returns must be 0%, to show how a lack of growth affects values and to underline the hypothetical nature of the illustration. Personalized illustrations may not use a rate above 12% either. The 14% assumption exceeds the ceiling, and no 0% case is shown. The ceiling is not a matter of the firm's judgment, and 15% is not a limit in the rule.FINRA Rule 2211(b)(5)

An insurer adds a new subaccount that copies the strategy of a well-known retail mutual fund run by the same manager. May its brochure show that mutual fund's past performance to promote the new subaccount?

• a.Yes, provided the brochure also shows the fees of both the mutual fund and the subaccount
• b.Yes, provided the mutual fund's returns are shown after deducting the insurance contract charges
• c.No, because an existing fund's record may not promote a similar but new option such as a clone fund✓
• d.Yes, because the same manager and strategy make it the same investment for performance purposes

A fund's performance that predates its inclusion in a variable product may be shown only if the existing fund itself became the option without significant changes. Communications may not include the performance of an existing fund to promote investment in a similar but new option, such as a clone or model fund. Showing fees or deducting contract charges does not change that, and using the same manager and strategy does not make two different vehicles one.FINRA Rule 2211(b)(1)

A variable life hypothetical illustration shows cash values using only the insurer's current charges, which are below the maximums stated in the policy. What does Rule 2211 require?

• a.Every assumed rate must use the maximum guaranteed charges; current charges may be added✓
• b.Charges need to be shown only at the 0% rate, since the other rates are purely hypothetical
• c.Charges are left out entirely, so the illustration shows only the separate account's gross return
• d.Current charges are enough, as long as the illustration labels them clearly as current charges

The illustrations must reflect the maximum guaranteed mortality and expense charges for each assumed rate of return, and current charges may be illustrated in addition. An illustration built only on lower current charges overstates values. The charges are not limited to the 0% case, and omitting charges would mislead about the policy's actual cash value and death benefit.FINRA Rule 2211(b)(5)(A)(iii)

A customer who bought a deferred variable annuity last year on a firm's recommendation now moves $40,000 from a bond subaccount to an equity subaccount of the same contract. Does Rule 2330 apply to the move?

• a.Yes, because every subaccount allocation needs principal review within seven business days of the move
• b.Yes, because the move counts as an exchange of one annuity for another contract
• c.Yes, but only when the reallocation exceeds 10% of the contract value at the time of the move
• d.No, because the rule does not cover reallocations among subaccounts after the initial purchase✓

Rule 2330 applies to recommended purchases and exchanges of deferred variable annuities and to recommended initial subaccount allocations. It does not apply to reallocations among subaccounts made after the initial purchase or exchange, or to later funds paid in. The seven-business-day principal review is tied to the application package for a purchase or exchange. No percentage threshold exists in the rule, and moving money within one contract is not an exchange of one annuity for another.FINRA Rule 2330(a)(1)

A firm recommends a deferred variable annuity to the trustees of a 403(b) plan that will offer it to all employees. It makes no recommendation to any individual employee. Does Rule 2330 apply?

• a.No, because plan transactions are exempt in every circumstance, even advice to a single participant
• b.Yes, but only for employees who reach age 59 and a half while the plan holds the annuity
• c.Yes, because the plan holds the annuity as a retirement product regardless of who receives the advice
• d.No, unless the firm makes recommendations about the annuity to an individual plan participant✓

Rule 2330 does not apply to deferred variable annuity transactions made in connection with a tax-qualified, employer-sponsored plan such as a qualified plan or one meeting Internal Revenue Code Sections 403(b), 457(b) or 457(f), unless the member or associated person makes recommendations to an individual plan participant. In that case the rule applies as to that participant. Advice to the plan trustees alone does not trigger it. The exemption is therefore not absolute, and age 59 and a half is not the test.FINRA Rule 2330(a)(1)

A customer's check payable to an insurer arrives before a principal has approved the recommended deferred variable annuity. May the broker-dealer forward it to the insurer?

• a.Yes, if the customer is told and the insurer agrees in writing to segregate the funds until approval or rejection✓
• b.Yes, with no further steps required, since the check is already made payable to the insurance company
• c.No, because customer funds may never leave the broker-dealer's possession before the principal approves it
• d.Yes, if the insurer promises to refund the money within 10 days should the principal reject the sale

Rule 2330 does not prohibit forwarding a check payable to the insurer before principal approval if the member discloses the proposed transfer to the customer and has a written agreement with the insurer under which it segregates the customers' funds, in an account equivalent to a special account for the exclusive benefit of customers, until it is told of approval or rejection. A flat ban is not in the rule, and neither is a bare refund promise. Simply forwarding the check without those conditions does not satisfy the supplementary material.FINRA Rule 2330, Supplementary Material .03

A broker-dealer's data show one representative handles far more deferred variable annuity exchanges than the rest of the sales force. What does Rule 2330 require the firm to have in place?

• a.Surveillance that flags exchange rates for review, plus corrective measures for inappropriate exchanges✓
• b.A shorter principal review of one business day for every exchange that representative proposes
• c.An automatic ban on exchanges by that representative until the next annual compliance review
• d.A quarterly report of each representative's exchange rate filed with FINRA's Advertising Regulation Department

Beyond its written supervisory procedures, a member must implement surveillance procedures to identify associated persons whose rates of deferred variable annuity exchanges raise questions about inappropriate exchanges, and must have policies and procedures reasonably designed to implement corrective measures for inappropriate exchanges and the conduct of the persons involved. The rule does not mandate an automatic ban, a regular filing with FINRA, or a different review period.FINRA Rule 2330(d)

A customer asks to exchange one deferred variable annuity for another. The firm's records show no exchange at the firm. What must the representative do about exchanges at other broker-dealers within the preceding 36 months?

• a.Nothing, because only exchanges completed at the recommending firm count toward the factor
• b.Make reasonable efforts to find out, such as asking the customer, and document the answer✓
• c.Ask only if the customer is older than 59 and a half, when the early-withdrawal tax penalty ends
• d.Obtain written confirmation from each other broker-dealer where the customer has held an account

The member must determine whether the customer had another deferred variable annuity exchange within the preceding 36 months at the member itself and must make reasonable efforts to learn whether one occurred at any other broker-dealer. An inquiry to the customer counts as a reasonable effort, and the member must document in writing both the nature of the inquiry and the customer's response. Ignoring other firms or demanding confirmation from every firm goes beyond or short of what the supplementary material says.FINRA Rule 2330, Supplementary Material .05

A fund company's ad says its fund is 'ranked first among funds with more than $5 billion in net assets,' using a category an independent ranking firm publishes. May the ad use that category?

• a.No, because no category may be based on a fund's asset size, even one a ranking entity publishes✓
• b.No, but only because the fund company, and not the ranking firm, picked the asset-size cutoff used
• c.Yes, if the asset threshold is printed prominently beside the rank so readers can judge it
• d.Yes, because the category is published by a ranking entity that is independent of the fund company

A retail communication must not use any category or subcategory based on the asset size of an investment company or investment company family, whether or not a ranking entity created it. Independence of the publisher does not make an asset-size category acceptable. Disclosing the threshold does not cure the problem, because the prohibition is on the category itself and not on a missing disclosure. The prohibition also does not turn on who picked the cutoff, so a category the ranking firm built is barred just as one the fund company built would be.FINRA Rule 2212(e)(3)

A growth fund in existence for 12 years is advertised as ranked 3rd of 1,204 funds on three-year total return by an independent ranking entity. No other ranking appears. What does Rule 2212 require?

• a.Nothing more, because a three-year ranking is longer than the one-year minimum the rule sets
• b.A one-year ranking only, because one year is the shortest ranking period that the rule allows
• c.The fund's own ten-year average annual return, which can stand in for the missing rankings
• d.One-, five- and ten-year total return rankings from the same ranking entity, category and period✓

A total return ranking must be accompanied by total return rankings for one year, one and five years, or one, five and ten years, depending on how long the investment company has existed, all from the same ranking entity, in the same category and on the same time basis. A fund in existence 12 years needs all three. Exceeding the one-year minimum does not remove the duty to show the longer periods. Showing only a one-year ranking would satisfy the rule for a fund less than five years old, not for this one. The fund's own return figure is not a ranking from the ranking entity and cannot replace the required rankings.FINRA Rule 2212(d)(2)(B)

A headline over a fund ad says 'The Best Performing Intermediate Bond Fund.' The ranking entity places the fund second of 310 in that category. May the ad run?

• a.Yes, because second place of 310 funds puts the fund in the top one percent of its category
• b.No, because rankings may appear in the body of an ad but are never allowed in a headline
• c.No, because a headline may call a fund the best only if it is actually ranked first✓
• d.Yes, if the body of the ad discloses the fund's actual rank and the number of funds ranked

A headline or other prominent statement must not state or imply that a fund is the best performer in a category unless the fund is actually ranked first. Second place does not qualify, however high the percentile. Disclosure of the true rank in the body cannot repair a prominent statement that overstates it, because the rule governs the headline itself. The rule does not bar rankings from headlines altogether; a fund that is ranked first may say so there.FINRA Rule 2212(c)(1)

A bond fund flyer prints an independent rating firm's volatility rating next to the words 'our risk rating.' What is the problem under Rule 2213?

• a.The rating must be dropped, because bond funds may not use volatility ratings in any retail communication
• b.A volatility rating may not be identified or described as a risk rating by the firm that prints it✓
• c.None, because a rating from an independent third party may be labeled any way the firm chooses to
• d.The flyer is acceptable if the label is followed by the rating firm's name and rating date

A retail communication may include a bond mutual fund volatility rating only if, among other conditions, the rating does not identify or describe volatility as a risk rating. Independence of the rating firm does not give the member freedom to relabel the rating. Volatility ratings are not banned; they are allowed when the conditions are met, so dropping the rating is not required. Naming the rating firm and the date are separate disclosures that the rule requires, and they do not cure a mislabeled rating.FINRA Rule 2213(b)(1)

A firm's online retirement-projection tool is used by retail customers. Its printed report explains the methodology and limitations but nothing else. What else must it show under Rule 2214?

• a.The 'IMPORTANT' legend only, because the statement about results varying is optional for every retail tool
• b.A statement that FINRA has reviewed the tool and approved its methodology for retail customers
• c.Nothing more, because describing the methodology and limitations satisfies every disclosure that the rule lists
• d.A statement that results vary with each use and over time, plus the 'IMPORTANT' hypothetical-results legend✓

A tool, its written reports and related retail communications must describe the criteria and methodology, including limitations and key assumptions, explain that results may vary with each use and over time, and display the 'IMPORTANT' legend saying that projections are hypothetical, do not reflect actual results and are not guarantees. A report with only the methodology is missing two items. The rule forbids a member from implying that FINRA endorses or approves a tool, so a statement of FINRA approval would add a violation. Neither of the two missing disclosures is optional.FINRA Rule 2214(c)(2), (c)(4)

A fund-screening tool offered to retail customers searches only funds from the firm's affiliated fund family. How must the firm treat that feature?

• a.Disclose in narrative form that the tool is limited to those funds, with the reason for the limit✓
• b.Disclose it only when the affiliated funds pay the firm revenue sharing on assets invested through the tool
• c.No disclosure is needed, because a tool that customers run on their own is outside the rule's disclosure duty
• d.Disclose it in the account agreement customers sign at opening, which then covers every later tool they use

The disclosure for a tool must say whether the tool searches or favors certain securities and, if so, why. Supplementary Material .06 adds that the disclosure must indicate whether the tool is limited to securities in which the member has a direct or indirect interest, and it must be clear, prominent and in written narrative form. The rule covers tools customers use independently as well as with assistance, so self-service use gives no exemption. An account agreement is not the tool, report or related communication in which the disclosure must appear. Revenue received is one trigger, but a limit to securities in which the member has any interest also requires disclosure, so revenue sharing is not the only case.FINRA Rule 2214(c)(3), Supplementary Material .06

A print ad for a stock fund charts the fund's five-year return in the body of the page. The required performance legend sits in a footnote at the foot of the page. Does the ad comply with Rule 482?

• a.No, because in a print ad the legend must be in the body, close to the performance data, not in a footnote✓
• b.Yes, because the legend appears on the same page as the performance data that it qualifies
• c.Yes, if the footnote is printed in a type size no smaller than the chart that presents the performance
• d.No, because the legend must sit on the first page of the ad ahead of any performance data

In a print advertisement the performance legend must be placed in close proximity to the performance data and in the body of the advertisement, not in a footnote. Matching the type size of the data helps with legibility, but the footnote placement is itself the defect. Appearing on the same page is not enough for the same reason. The rule asks for proximity to the data and does not require the legend to lead the ad or to appear on its first page.Securities Act Rule 482(b)(5)

A bond fund ad shows its 30-day SEC yield of 4.6% in large bold type, with the one-, five- and ten-year average annual total returns beneath it in small type. Which Rule 482 requirement does the ad break?

• a.Yield must be a trailing twelve-month figure instead of a yield computed on the Form N-1A basis
• b.Yield may be quoted only in sales literature, not in an advertisement for an open-end fund
• c.Yield may be set out in no greater prominence than the required total return quotations✓
• d.Total return must be quoted for one year only whenever a yield appears in the same ad

A current yield in an advertisement must be computed by the Form N-1A method, accompanied by the standardized average annual total returns, and set out with no greater prominence than the total return quotations. The bold, larger yield breaks the prominence limit. Open-end funds may quote yield in advertisements when these conditions are met. The accompanying total return covers the one-, five- and ten-year periods, not one year only. The yield method is the standardized Form N-1A computation over a base period, not a trailing twelve-month figure.Securities Act Rule 482(d)(1)

A fund's ad carries every required Rule 482 legend and also includes a tear-off application for new investors. What is the effect of the application?

• a.The ad stays valid, but only for investors who already own shares of the same fund today
• b.None, provided the application is marked as not binding until the registration statement is effective
• c.The ad loses Rule 482 status, because it may not contain or come with an application✓
• d.None, because the legends already tell the investor to read the prospectus before applying

An advertisement that complies with Rule 482 may not contain or be accompanied by an application through which a prospective investor can invest. Once an application is included, the piece cannot rely on the rule. The legends do not change that bar. A non-binding label echoes the Rule 134 mechanism for non-fund offerings but gives no relief here. Existing shareholders are not carved out of the prohibition either.Securities Act Rule 482(c)

A money market fund ad quotes the fund's one-year total return. What must accompany that quotation?

• a.Nothing further, because total return is the only performance measure money market funds use
• b.An effective yield alone, set beneath the total return in a smaller size of print
• c.A quotation of current yield, placed beside the total return in the same size print and type style✓
• d.A tax-equivalent yield at the investor's top bracket, set beside the total return in a box

A money market fund ad that quotes total return must accompany it with the fund's current yield, place the two next to each other in the same size print, and add a statement that the yield more closely reflects current earnings if the two figures differ materially. Money market funds may quote yield, so total return is not their only permitted measure. An effective yield may appear only alongside a current yield of the same base period, so it cannot take the place of the current yield. A tax-equivalent yield is likewise permitted only with a current yield and a stated tax rate.Securities Act Rule 482(e)(2)

A broker-dealer runs a newspaper ad explaining that balanced, income and no-load funds suit different goals and inviting readers to call for information. It names no fund and gives the firm's name and address. How is it treated under Rule 135a?

• a.It is allowed only if the broker-dealer is also the principal underwriter of the funds described
• b.It is a prospectus under Section 2(a)(10) and must satisfy Section 10 first
• c.It is an offer, so it must carry the Rule 482 performance legend and a prospectus source
• d.It is not deemed an offer for Section 5 purposes, so no prospectus has to come with it✓

Generic advertising that names no particular fund, limits itself to explanatory information, types of funds or an invitation to inquire, and shows the sponsor's name and address is not deemed an offer for Section 5. It therefore needs no accompanying prospectus. Because it is not an offer, the Section 10 and Rule 482 content requirements do not apply to it. No underwriter relationship is needed; the sponsor must be a registered broker-dealer or another person who actually offers the type of product described.Securities Act Rule 135a