FINRA Series 6 — All Questions

Urging a customer to buy fund shares immediately so the customer can "capture" an upcoming distribution is prohibited because:

• a.The customer would be required to hold the shares for 12 months
• b.Distributions cannot be paid to shareholders of record for the first 30 days
• c.The share price drops by the amount of the distribution, so the customer gains nothing and incurs a current tax liability✓
• d.Funds are not permitted to pay distributions more than once a year

Selling dividends is deceptive because the NAV falls by the distribution amount on the ex-date, leaving the investor with the same total value but an immediate taxable event. There is no 30-day record-date restriction, no annual limit on distributions, and no mandatory holding period. The customer is worse off after tax, which is why the pitch is prohibited.FINRA Rules

A representative learns that an institutional customer is about to place a very large buy order and immediately buys the same security for a personal account. This is:

• a.Permitted, because personal trades are unrelated to customer business
• b.Front-running, a prohibited practice and a form of market abuse✓
• c.Permitted if the representative discloses the trade to a supervisor afterward
• d.Permitted if the personal order is smaller than the customer's order

Trading ahead of a customer's known block order to profit from the expected price move misuses confidential customer information and is prohibited regardless of size or after-the-fact disclosure. The prohibition applies to accounts in which the representative has any beneficial interest. Supervisors cannot bless conduct that is itself a violation.Securities Exchange Act of 1934

A customer is nervous about market volatility and the representative offers to personally reimburse any losses in the first year. This offer is:

• a.Acceptable if the representative pays the losses from personal funds
• b.Acceptable if the branch manager approves it in writing and the firm files the required disclosure
• c.Prohibited, because a registered person may not guarantee a customer against loss✓
• d.Acceptable if the representative documents it in the client file and also notifies the branch office manager

Rule 2150(b) bars any guarantee of a customer against loss. Paying the losses from personal funds, written branch approval, a file note and notifying a manager all fail to cure it, and account size is irrelevant. Sharing in an account is the separate, narrow Rule 2150(c) exception: prior written authorization from the firm and the customer and a share proportionate to the representative's own contribution.FINRA Rule 2150(b)

A registered representative may share in the profits and losses of a customer's account only if:

• a.The account is a joint account with an immediate family member of the customer
• b.The firm and the customer give prior written approval and sharing is proportionate to the representative's financial contribution✓
• c.The firm approves in writing and the customer is notified within 30 days after the sharing begins
• d.The customer gives prior written approval and the representative shares equally in all gains and losses

Rule 2150(c) allows sharing only with prior written authorization from both the employing firm and the customer, and only in direct proportion to the representative's own financial contribution. A verbal request never meets the written standard, approval or notice after sharing has begun is too late, and an equal split ignores proportionality. A customer's family relationships do not matter: the immediate-family exemption covers only the representative's own family accounts, and it waives the proportionality limit, not the written approvals.FINRA Rule 2150(c)

A representative tells a prospect, "Buy this fund before Friday's record date so you get the $0.40 per share distribution for free." This statement is:

• a.Prohibited, because it is selling dividends and misrepresents an economic benefit✓
• b.Prohibited only if the customer holds the shares less than 60 days measured after the record date
• c.Acceptable if the customer is in a low tax bracket and does not itemize any deductions on the return
• d.Acceptable because the distribution is a real benefit to shareholders who buy in just before the record date

The pitch is selling dividends: the fund's NAV declines by the distribution amount, so the investor simply converts part of the investment into a taxable payment. A low tax bracket reduces the harm but does not make the misrepresentation acceptable. The violation lies in the misleading sales pitch, not in any holding period.FINRA Rules

Which of the following would most likely be viewed as a prohibited practice by a registered representative?

• a.Sending a customer a copy of the fund's current prospectus
• b.Depositing a customer's check into the representative's own bank account overnight before forwarding it✓
• c.Documenting a customer's risk tolerance before a recommendation
• d.Recommending a Class A purchase at a breakpoint the customer qualifies for under the fund's published breakpoint schedule

Commingling customer funds with a representative's personal funds, even briefly, is a serious violation and can constitute conversion. Recommending a breakpoint-qualified purchase, delivering a prospectus, and documenting risk tolerance are all required or encouraged practices. Customer checks must be forwarded promptly to the firm.FINRA Rules

Under FINRA's communications rules, a written message distributed to more than 25 retail investors within any 30 calendar-day period is classified as:

• a.A public appearance
• b.Correspondence
• c.A retail communication✓
• d.An institutional communication

The 25-recipient threshold in a rolling 30-day window separates correspondence from retail communications, and exceeding it triggers the stricter principal approval and filing framework. Institutional communications are those directed only to institutional investors. A public appearance covers unscripted live presentations rather than written material.FINRA Rule 2210 (Communications with the Public)

A representative emails an identical market update to 18 individual retail clients in one month. This communication is categorized as:

• a.An advertisement requiring filing with FINRA
• b.An institutional communication exempt from review, because it went to more than the retail delivery threshold of recipients
• c.Correspondence, subject to supervision and review procedures✓
• d.A retail communication requiring pre-use principal approval within ten business days of first use

Because the message reaches 25 or fewer retail investors within 30 days, it is correspondence, which firms must supervise and review under their written procedures but need not approve before use. Crossing the 25-recipient line would convert it into a retail communication. Retail clients are not institutional investors, and correspondence is not filed with FINRA.FINRA Rule 2210 (Communications with the Public)

An institutional communication is one distributed exclusively to:

• a.Prospective retail customers who have signed a suitability waiver
• b.Institutional investors such as banks, insurance companies, registered investment companies, and qualifying entities✓
• c.Employees of the member firm
• d.Any customer with an account balance over $250,000

The institutional category depends on the type of recipient, not on account size or paperwork, and covers entities such as banks, insurers, registered investment companies, and other qualifying institutions. A wealthy individual is still a retail investor. Suitability obligations cannot be waived by a customer signature.FINRA Rule 2210 (Communications with the Public)

Retail communications must generally be:

• a.Approved by the SEC before use and formally cleared for public distribution first
• b.Approved by the customer in writing before the firm may distribute the material to anyone
• c.Approved by an appropriately registered principal before first use or filing✓
• d.Reviewed by the fund's board of directors and the fund's transfer agent before distribution

A registered principal of the firm must sign off on retail communications before they are used or filed, which places accountability inside the member firm. The SEC does not pre-approve sales material, and fund boards oversee the fund rather than a distributor's advertising. Customers never approve communications directed at them.FINRA Rule 2210 (Communications with the Public)

How long must a member firm retain records of its communications with the public?

• a.Six years, the same period that applies to customer account records after an account is closed
• b.One year from first use, after which it may be discarded
• c.Five years from the date of creation, consistent with the anti-money-laundering recordkeeping period
• d.Three years, with the first two years in an easily accessible place✓

FINRA Rule 2210(b)(4)(A) requires members to keep communications for the retention period in SEA Rule 17a-4(b), and Rule 17a-4(b)(4) calls for not less than three years, the first two in an easily accessible place. Six years is the period for account record information after an account closes, five years is the period associated with anti-money-laundering records, and a one-year period is not part of the rule at all.FINRA Rule 2210(b)(4)(A); SEA Rule 17a-4(b)(4)

A retail communication concerning a registered investment company that includes fund performance generally must be filed with FINRA:

• a.Only when FINRA's Advertising Regulation Department asks for it, for example after a customer complaint about the piece
• b.Within 90 days after the end of the calendar quarter in which the communication was first used
• c.Within 10 business days of first use✓
• d.At least 10 business days before first use, because every retail communication about a fund needs pre-use filing

Most investment company retail communications are filed with FINRA's Advertising Regulation Department within 10 business days of first use or publication (Rule 2210(c)(3)). Pre-use filing applies to specific categories, such as comparisons built on a ranking category the firm created rather than one that is published. Quarterly batching and complaint-triggered filing are not part of the rule.FINRA Rule 2210(c)(3)(A)

Which practice is permitted when presenting mutual fund performance in a retail communication?

• a.Describing a bond fund's yield as guaranteed because its portfolio holds only investment-grade corporate issuers
• b.Projecting the fund's expected return over the next five years
• c.Showing only the fund's best three-year period
• d.Showing standardized average annual total returns for 1-, 5-, and 10-year periods, or the life of the fund✓

Standardized total returns for the required periods, current as of the most recent quarter end, give investors a consistent basis for comparison. Cherry-picking a favorable period, projecting future performance, and calling any return guaranteed are all misleading and prohibited. Communications must also disclose that past performance does not predict future results.FINRA Rule 2210(d)(1)(F) and (d)(5); SEC Rule 482 (17 CFR 230.482)

A firm wants to include a customer testimonial in a retail communication. Which requirement applies?

• a.The firm must disclose a testimonial as paid whenever the customer received any compensation at all
• b.The testimonial must carry only a statement that past performance does not guarantee future results
• c.Testimonials may appear only in institutional communications and never in retail communications
• d.It must prominently disclose that it may not represent other customers' experience or guarantee results, and that it was paid if more than $100 in value was paid✓

Rule 2210(d)(6) requires a retail communication that carries a testimonial about the member's advice or performance to disclose prominently that the testimonial may not be representative of other customers' experience, that it is no guarantee of future performance, and, if more than $100 in value was paid for it, that it is a paid testimonial. Disclosing payment of any amount over-reads the $100 threshold, a performance disclaimer alone omits the representativeness statement, and testimonials are not limited to institutional communications. If the testimonial concerns a technical aspect of investing, the speaker must have the knowledge and experience to form a valid opinion.FINRA Rule 2210(d)(6)

A customer deposits $12,000 in cash in a single business day. The firm must file:

• a.Nothing, because the deposit is under $25,000
• b.Form 1099-B with the IRS
• c.A Suspicious Activity Report only
• d.A Currency Transaction Report✓

Currency transactions of more than $10,000 in one business day trigger a Currency Transaction Report under the Bank Secrecy Act, regardless of whether anything appears suspicious. A SAR is required only when the activity itself raises suspicion. Form 1099-B reports proceeds of sales, not deposits.Bank Secrecy Act

When a firm files a Suspicious Activity Report on a customer's transactions, the firm:

• a.Must not notify the customer that a SAR was filed✓
• b.Must close the account immediately
• c.Must give the customer a copy within 10 business days
• d.May notify the customer only with the customer's written consent

Tipping off a customer about a SAR filing is prohibited because it would compromise any resulting investigation. SARs generally apply to suspicious transactions of $5,000 or more and are filed with FinCEN, typically within 30 days of detection. Filing does not automatically require closing the account, though the firm may choose to do so.Bank Secrecy Act

A firm's customer identification program must, at a minimum, collect which information from a new individual customer?

• a.Employer name, annual income, net worth, and investment experience collected and retained for the firm's own records
• b.Name, date of birth, physical address, and taxpayer identification number✓
• c.Passport number and two professional references
• d.Credit score, marital status, and number of dependents collected for the customer's new-account file

The customer identification program requires name, date of birth, a street address, and a government identification number so the firm can form a reasonable belief that it knows the customer's identity. Financial profile items such as income and net worth are gathered for suitability purposes, not identity verification. Credit scores and references are not CIP elements.USA PATRIOT Act

Before opening an account, a firm must check the prospective customer's name against the list of Specially Designated Nationals maintained by:

• a.The Office of Foreign Assets Control✓
• b.FINRA's Central Registration Depository
• c.The Municipal Securities Rulemaking Board
• d.The Securities Investor Protection Corporation

OFAC publishes the Specially Designated Nationals list, and firms are prohibited from doing business with parties named on it. The CRD holds registration records for individuals and firms, the MSRB writes municipal rules, and SIPC provides limited account protection if a broker-dealer fails. None of those three maintains sanctions lists.USA PATRIOT Act

In an account registered as joint tenants with rights of survivorship, when one owner dies:

• a.The account converts automatically to tenants in common between the surviving owner and the deceased owner's estate
• b.The deceased owner's interest passes to the deceased owner's estate under the residuary clause of the deceased owner's will
• c.The deceased owner's interest passes automatically to the surviving owner✓
• d.The account must be liquidated and the proceeds split evenly

Rights of survivorship mean the surviving tenant takes full ownership without the assets passing through probate. Passing the interest to the estate is the defining feature of tenants in common, not JTWROS. Nothing in the registration forces liquidation or an automatic change of form, though the firm will require a death certificate and new paperwork.

Two business partners open an account as tenants in common with a 70/30 ownership split. If one partner dies, that partner's share:

• a.Passes to the surviving partner
• b.Is divided evenly between the surviving partner and the deceased partner's estate under state law
• c.Passes to the deceased partner's estate according to that partner's will or state law✓
• d.Passes to the beneficiary named on the account, outside the estate and without probate

Tenants in common may hold unequal shares, and each owner's share passes to that owner's estate under the will or state law, not to the co-tenant. Passing automatically to the survivor is the right of survivorship that belongs to joint tenants with rights of survivorship. A named beneficiary that bypasses probate is a transfer-on-death registration, and ownership is never split evenly or taken over by the broker-dealer.

Which statement about an UTMA custodial account is correct?

• a.Gifts to the account may be revoked by the donor at any time
• b.The custodian may pledge the account's securities as collateral for a personal loan only with the custodian's written notice to the firm
• c.The account may have two custodians so parents can share responsibility for the single minor beneficiary of the account
• d.Gifts are irrevocable, and the account may have only one custodian and one minor beneficiary✓

A gift into a custodial account is an irrevocable transfer to the minor, and the structure permits exactly one custodian and one minor per account. Joint custodians and joint minors are not allowed, so parents wanting shared control cannot achieve it through the registration. Using the minor's property for the custodian's benefit would violate the custodian's fiduciary duty.Uniform Transfers to Minors Act

An UGMA account for an 11-year-old is registered under which taxpayer identification number, and how is income reported?

• a.The donor's Social Security number, with income taxed to the donor
• b.The custodian's Social Security number, with income taxed to the custodian
• c.The broker-dealer's tax identification number, with income taxed to the firm
• d.The minor's Social Security number, with income taxed to the minor✓

Although the custodian controls the account, the property belongs to the minor, so the minor's Social Security number appears on the registration and the minor is the taxpayer. Some unearned income of a young child may still be taxed at the parents' rate under the kiddie tax rules, but the income is reported for the minor. The custodian, donor, and firm are never the account's taxpayer.Uniform Gifts to Minors Act

When the beneficiary of a custodial account reaches the age of majority set by state law:

• a.The assets must be re-registered in the former minor's own name and control passes to that person✓
• b.Ownership reverts to the original donor
• c.The custodian may continue managing the account indefinitely for as long as the family wishes it to continue
• d.The account must be liquidated and the proceeds donated

Custodianship ends at the state's age of majority or termination age, and the property is retitled in the now-adult beneficiary's name with full control over it. The custodian's authority is not open-ended. Because the original gift was irrevocable, neither the donor nor anyone else can reclaim the assets.Uniform Transfers to Minors Act

To open a brokerage account in the name of a trust, the firm must obtain:

• a.A court order appointing the trustee, in every case before any brokerage account may be opened for the trust
• b.Only the trustee's Social Security number
• c.The trust agreement or a certification of trust identifying the trustee and the trustee's powers✓
• d.Written consent from every trust beneficiary

The firm needs documentation establishing who the trustee is and what investment authority the trust grants before accepting instructions. A personal Social Security number is not sufficient because the trust is a separate legal entity with its own tax identification number. Court appointment and beneficiary consents are not routinely required for a properly documented trust.

Which document must a broker-dealer obtain before opening a corporate cash account?

• a.The personal guarantee of each officer
• b.A corporate resolution identifying who is authorized to trade on the corporation's behalf✓
• c.A copy of the corporation's most recent audited financial statements for the two most recent completed fiscal years
• d.A prospectus for the corporation's own securities

The corporate resolution establishes the entity's authority to open the account and names the individuals empowered to act. Financial statements may be requested in other contexts but are not a prerequisite for a cash account. Officers do not personally guarantee a corporate account, and the corporation's own offering documents are irrelevant.

A customer asks a representative to select which mutual funds to buy and when to buy them, without checking first. The representative may do so only if:

• a.The customer gives written discretionary authority and a principal approves the account for discretionary trading✓
• b.The customer's account exceeds a minimum balance set by the firm
• c.The customer confirms each trade verbally within one business day
• d.The representative documents the customer's verbal instruction in a file memo

Discretion over asset, amount, and timing requires prior written authorization from the customer plus firm acceptance and supervisory review of the discretionary account. Verbal permission is limited to time and price discretion for a specific order on the day it is given. Account size never substitutes for written authority.FINRA Rules

Whether a Traditional IRA contribution is deductible for a given taxpayer depends primarily on:

• a.Whether the contribution is made before or after the calendar year ends
• b.The custodian's fee schedule
• c.The investments selected inside the IRA
• d.Whether the taxpayer or spouse is covered by an employer retirement plan and the taxpayer's modified adjusted gross income✓

Anyone with earned income may contribute to a Traditional IRA, but deductibility phases out based on income when the taxpayer or spouse participates in a workplace plan. Investment choices and custodian fees have no effect on deductibility. Contributions may be made up to the tax filing deadline for the prior year, which affects timing but not the deduction test.Internal Revenue Code

Which statement about Roth IRA distributions is accurate?

• a.Earnings are always taxable but contributions are not
• b.Distributions are taxed the same as Traditional IRA distributions
• c.All distributions are tax free from the day the account is opened
• d.Earnings are tax free if the account has been open five years and the owner is at least 59 1/2, disabled, or deceased, or is buying a first home within limits✓

A qualified Roth distribution requires both the five-year holding period and a qualifying event, and it comes out entirely free of federal income tax. Contributions, having already been taxed, may be withdrawn at any time without tax or penalty, so it is wrong to say nothing is available early. Traditional IRA distributions of deductible contributions and earnings are fully taxable, which is the key difference.Internal Revenue Code

A 44-year-old takes $15,000 from a Traditional IRA to remodel a kitchen. The federal tax consequence is:

• a.No tax and no penalty, because IRA owners may withdraw principal at any time without any restriction on the timing
• b.Ordinary income tax on the taxable amount plus a 10% early distribution penalty✓
• c.Tax only, because home improvements are a qualified expense
• d.A 10% penalty only, with no income tax until age 59 1/2 is finally reached by the account owner

Distributions before age 59 1/2 are included in ordinary income and carry an additional 10% penalty unless an exception applies, and home remodeling is not an exception. The narrow exceptions include death, disability, qualified higher education expenses, up to $10,000 for a first-time home purchase, substantially equal periodic payments, and certain medical costs. Tax and penalty apply together, not one or the other.Internal Revenue Code

Which statement about required minimum distributions is correct?

• a.RMDs apply only to accounts larger than $1 million
• b.Traditional IRA owners must begin RMDs at the age set by current law, while Roth IRA owners face no RMDs during their lifetime✓
• c.Both Traditional and Roth IRA owners must begin RMDs at the same age
• d.Roth IRA owners must begin RMDs but Traditional IRA owners need not

Tax-deferred accounts such as Traditional IRAs must begin distributing at the statutory age, currently 73 and scheduled to rise, because the government eventually wants its deferred tax. Roth IRAs were funded with after-tax dollars, so the original owner never faces lifetime RMDs, though inherited Roth accounts have their own rules. Account size does not determine whether RMDs apply.SECURE Act 2.0

A 401(k) plan is best described as:

• a.A defined contribution plan funded through employee salary deferrals, often with employer matching contributions✓
• b.A non-qualified deferred compensation arrangement available only to executives
• c.An individual retirement account funded solely by the account owner outside of work, with no involvement from the employer at any point
• d.A defined benefit plan that promises a fixed monthly pension

A 401(k) lets employees defer part of their salary into a qualified plan on a pre-tax or Roth basis, frequently with an employer match, and the eventual benefit depends on contributions and investment results. A defined benefit plan guarantees a formula-based pension instead. IRAs are individual accounts, and non-qualified plans are not subject to the same qualified plan rules.Internal Revenue Code

A 403(b) tax-sheltered annuity plan is available to employees of:

• a.Public schools and qualifying 501(c)(3) tax-exempt organizations✓
• b.Federal government agencies exclusively, which fund the plan through the federal Thrift Savings Plan structure
• c.Any corporation with fewer than 100 employees that sponsor a payroll savings arrangement
• d.Self-employed individuals only

Section 403(b) plans serve public education employees and staff of qualifying tax-exempt organizations such as hospitals and charities. Small private employers commonly use SIMPLE or SEP plans, and the self-employed may use SEP or solo 401(k) arrangements. Federal employees participate in the Thrift Savings Plan.Internal Revenue Code

A key characteristic of a SEP IRA is that:

• a.Each employee must make a minimum annual salary deferral for the plan to remain qualified
• b.The plan requires annual actuarial certification
• c.Contributions are made by the employer into IRAs established for eligible employees✓
• d.Employees contribute by salary reduction and the employer must match up to 3% of pay

A simplified employee pension is funded by employer contributions deposited into each eligible employee's own IRA, which keeps administration light. Required employee salary deferrals belong to 401(k)-type plans, and a mandatory employer match of up to 3% of pay is a SIMPLE IRA feature. Annual actuarial certification belongs to defined benefit plans, and a SEP is a defined contribution arrangement, so no actuary is needed.Internal Revenue Code

A customer receives a distribution check from a former employer's 401(k) plan and wants to move the money to an IRA. Which statement is correct?

• a.The customer has 12 months to complete the rollover
• b.Rollovers from employer plans to IRAs are not permitted
• c.The customer generally has 60 days to deposit the funds into the IRA, and a direct trustee-to-trustee transfer avoids withholding and the deadline✓
• d.The customer may complete an indirect rollover as many times as desired in a 12-month period

An indirect rollover must be completed within 60 days or the distribution becomes taxable, and plan distributions paid to the participant are generally subject to mandatory federal withholding. A direct transfer between custodians sidesteps both problems and has no frequency limit. IRA-to-IRA indirect rollovers are limited to one in any 12-month period.Internal Revenue Code

Before recommending a variable annuity to a retail customer, a representative must have a reasonable basis grounded in which information?

• a.The separate account's performance over the past 12 months compared with peer funds
• b.The commission the product pays relative to alternatives and the surrender charge period it carries
• c.The customer's credit score, employment history and bank balances held at other firms
• d.The customer's age, financial situation, tax status, investment objectives, time horizon, liquidity needs, and risk tolerance✓

Regulation Best Interest requires a representative to have a reasonable basis grounded in the customer's investment profile, which includes age, other investments, financial situation and needs, tax status, investment objectives, experience, time horizon, liquidity needs and risk tolerance, before recommending a product. Compensation is a conflict of interest to be managed, not a basis for a recommendation, and recent performance or a credit score says nothing about whether a variable annuity fits this investor.Regulation Best Interest, 17 CFR 240.15l-1(b)(2)

A 72-year-old retiree needs to draw income from a $60,000 lump sum within the next 12 months and has no other liquid savings. Which recommendation is least suitable?

• a.A deferred variable annuity with a seven-year surrender charge schedule✓
• b.A money market fund
• c.A short-term bond fund chosen for its stability and quick access to principal within a year
• d.A conservative balanced fund with a small equity allocation suited to a multi-year investment horizon

Locking the customer's only liquid money into a contract with a long surrender period directly conflicts with a one-year liquidity need and would likely trigger surrender charges. The other choices keep the money accessible with varying degrees of price risk. Liquidity needs and time horizon are central suitability factors, especially for older investors.FINRA Rules

A 28-year-old contributing monthly to an IRA states that the goal is maximum long-term growth and that no withdrawals are planned for 30 years. The most appropriate recommendation is:

• a.A single-state municipal bond fund
• b.A diversified equity growth fund✓
• c.A short-term Treasury fund
• d.A money market fund

A three-decade horizon and a growth objective favor equities, whose higher expected return compensates for interim volatility. Short-term Treasuries and money market funds are unlikely to outpace inflation over 30 years, exposing the investor to purchasing power risk. Municipal bonds are inappropriate inside an IRA because the tax exemption is wasted in a tax-deferred account.FINRA Rules

A customer wants to park six months of living expenses where the money is safe and available on short notice. Which fund best matches that objective?

• a.A money market fund✓
• b.A high-yield corporate bond fund
• c.A long-term government bond fund
• d.An aggressive growth fund

Money market funds emphasize preservation of principal and same-day or next-day liquidity, which fits an emergency reserve. High-yield bonds carry substantial credit risk and growth funds substantial market risk. Long-term government bonds have little credit risk but significant interest rate risk, so their value can fall when the money is needed.FINRA Rules

Which statement about the new account form for a retail cash account is correct?

• a.The form must be filed with FINRA before the first trade is executed in the customer's newly opened account
• b.Only the customer's signature is required, not a principal's review and approval of the new account
• c.The customer's signature is not required, but the form must be approved by a principal of the firm✓
• d.The customer must sign the form before any trade may be entered in the customer's newly opened retail cash account

For a standard cash account, the registered representative completes the form and a principal accepts the account; the customer's signature is not a regulatory requirement, although firms often collect one. Customer signatures are required for margin agreements, discretionary authority, and options accounts. New account forms are maintained at the firm, not filed with FINRA.FINRA Rules

A representative learns that an individual account holder has died. The representative should:

• a.Transfer the assets to the named beneficiary the same day
• b.Continue accepting instructions from the customer's spouse
• c.Liquidate all positions immediately to protect the estate
• d.Cancel all open orders, mark the account deceased, and await required documents such as a death certificate and letters testamentary✓

On notice of death the firm freezes the account, cancels open orders, and takes instructions only from the duly appointed representative of the estate after receiving proper documentation. Family members have no authority merely by relationship. Liquidating or transferring assets before documentation could expose the firm and the representative to liability.FINRA Rules

When a customer submits a transfer instruction to move an account from one broker-dealer to another through the automated transfer system, the carrying firm must:

• a.Validate or take exception to the instruction within one business day and complete the transfer within three business days of validation✓
• b.Validate or take exception to the instruction within three business days and complete the transfer within five business days after validation
• c.Obtain FINRA's approval before releasing the assets, then complete the transfer within three business days
• d.Validate within one business day, liquidate all positions to cash, and complete the transfer within thirty calendar days

Rule 11870 gives the carrying firm one business day to validate the transfer instruction or take exception, and three business days after validation to complete the transfer. The longer schedules of three and five days or thirty calendar days are not the rule. Assets move in kind whenever the receiving firm can hold them, so liquidating positions is wrong, and FINRA sets the timeframes but does not approve individual transfers.FINRA Rule 11870(b) and (e)

A firm must send the customer a copy of the account record for verification of the customer's investment profile information:

• a.Within 30 days of opening the account and at least once every 12 months thereafter whether or not anything changed
• b.Within 30 days of opening the account and at least once every 36 months thereafter✓
• c.Within 60 days of opening the account and at least once every 24 months while it stays open
• d.At account opening and again only when the customer asks for a copy in writing

SEC Rule 17a-3(a)(17) requires the firm to furnish the account record to the customer within 30 days of opening the account and at intervals no greater than 36 months afterward, and to notify the customer of any change of name or address. A 12-month or 24-month cycle, a 60-day first mailing, and a request-only approach are all different from the rule and would leave profile data stale.SEC Rule 17a-3(a)(17) (17 CFR 240.17a-3)

An investor bought fund shares four months ago and now receives a capital gains distribution from the fund. How is that distribution taxed?

• a.As a short-term gain, because the investor held the shares less than one year at the time of the capital gains distribution
• b.As a long-term capital gain, regardless of how long the investor held the shares✓
• c.It is not taxable until the shares are sold
• d.As ordinary income, because all fund distributions are ordinary income that are paid out to the investor

Capital gains distributions passed through by a fund are always reported as long-term because the fund's own holding period governs, not the shareholder's. The shareholder's holding period matters only when the shareholder sells the fund shares. Distributions are taxable in the year received even if automatically reinvested.Internal Revenue Code

Qualified dividends distributed by an equity mutual fund to a taxable account are generally taxed:

• a.Not at all, because the fund already paid tax on them at the corporate level before passing them through to shareholders
• b.At the lower long-term capital gains rates, if the applicable holding period requirements are met✓
• c.At the investor's ordinary income rate in all cases, exactly as ordinary short-term trading profits are taxed
• d.Only when the investor eventually sells the fund shares

Dividends that meet the qualified dividend requirements receive the favorable long-term capital gains rates rather than ordinary income treatment. Non-qualified dividends, including most interest income passed through by bond funds, are taxed as ordinary income. A regulated investment company generally pays no entity-level tax on distributed income, so the shareholder is the taxpayer.Internal Revenue Code

A fund makes a distribution characterized as a return of capital. The immediate effect on the shareholder is:

• a.An increase in the shareholder's cost basis
• b.Ordinary income tax on the full amount
• c.A long-term capital gain equal to the distribution, reportable by the shareholder in the current tax year
• d.A reduction in the shareholder's cost basis, with no current tax✓

A return of capital is the investor's own money coming back, so it is not currently taxable but it lowers basis, which increases the taxable gain on a later sale. Once basis reaches zero, further return of capital distributions become taxable gain. Treating it as income or as a current capital gain double counts the tax.Internal Revenue Code

An investor automatically reinvests $3,000 of taxable fund distributions over several years. The effect on cost basis is that basis:

• a.Is irrelevant, since reinvested shares are always tax free when sold
• b.Stays the same, because no new money was added from outside the account
• c.Increases by the $3,000, because the distributions were already taxed✓
• d.Decreases by the $3,000

Reinvested distributions are taxed in the year received, so adding them to basis prevents the same dollars from being taxed again when the shares are sold. Failing to track reinvestments is a common cause of investors overstating their taxable gain. Basis decreases only for return of capital distributions.Internal Revenue Code

An investor sells fund shares at a $4,000 loss on March 10 and buys shares of the same fund on March 25. The result is:

• a.The loss is disallowed under the wash sale rule and is added to the basis of the newly purchased shares✓
• b.Only half the loss is deductible
• c.The loss is permanently forfeited and can never be added to the cost basis of any replacement shares purchased later
• d.The full $4,000 loss is deductible in the current year despite the repurchase of the identical fund shares within days

Repurchasing a substantially identical security within 30 days before or after the sale triggers the wash sale rule, deferring the loss rather than eliminating it. The disallowed amount is added to the basis of the replacement shares, so the benefit is recovered on a later sale. Waiting 31 days would have preserved the current deduction.Internal Revenue Code

Which cost basis method applies to mutual fund shares if the shareholder makes no election?

• a.Last in, first out
• b.Average cost, single category
• c.Specific identification of the highest-cost shares
• d.First in, first out✓

Absent an election, the IRS default for securities including mutual fund shares is first in, first out, which sells the oldest shares first. Shareholders may instead identify specific shares at the time of sale or, for fund shares, elect an average cost method through the fund. LIFO is not an available basis method for these shares.Internal Revenue Code

An investor exchanges shares of a growth fund for shares of a bond fund within the same fund family at net asset value. For tax purposes, this exchange is:

• a.Taxable only if the exchange occurs within one year of purchase of the original growth fund shares
• b.Tax free, because no sales charge was paid
• c.Tax free, because the money never left the fund family
• d.A taxable event, treated as a sale of the growth fund and a purchase of the bond fund✓

An exchange privilege waives the sales charge but does not change the tax character of the transaction: the investor has disposed of one security and acquired another, so any gain or loss is recognized. This is a frequent source of surprise tax bills for customers and should be disclosed before the exchange. Timing affects only whether the gain is short or long term.Internal Revenue Code

A shareholder of a municipal bond fund receives $900 of income distributions and a $500 capital gains distribution. The federal tax treatment is:

• a.The income is taxable as ordinary income, while the capital gains distribution is exempt because it comes from tax-exempt bonds
• b.Both amounts are exempt from federal income tax, because every distribution keeps the exempt character of the bonds
• c.The income distribution is generally exempt from federal income tax, while the capital gains distribution is taxable✓
• d.Both amounts are taxable, because exempt interest passes through only on bonds held directly, not through a fund

A qualifying municipal bond fund can pay exempt-interest dividends, so interest passed through from municipal bonds keeps its federal tax-exempt character (Internal Revenue Code Section 852(b)(5)), but a capital gain dividend is excluded from that treatment and is taxable. Investors often assume a municipal fund is entirely tax free, which is why this distinction matters. Certain private activity bond income may also be subject to the alternative minimum tax.Internal Revenue Code Section 852(b)(5)