FINRA Series 6 — All Questions

In a year when the largest companies in the S&P 500 sharply outperform the smaller ones, how would a cap-weighted S&P 500 index fund likely compare with an equal-weight S&P 500 fund?

• a.The two funds would match, since both hold the same 500 stocks
• b.The equal-weight fund would likely do better, as it holds more dollars in the biggest companies
• c.The cap-weighted fund, since it holds larger positions in the biggest companies✓
• d.The cap-weighted fund would likely do worse, as it holds fewer shares of the smallest companies

A cap-weighted index puts the most money in the largest companies, so a rally led by them lifts it more than an equal-weight fund that gives each company the same weight. Holding the same stocks does not mean the same return, because the weights differ. The equal-weight fund holds fewer dollars, not more, in the biggest names.

A stock fund has an average annual return of 8% and a standard deviation of 12%. Assuming returns are normally distributed, between which two figures would about two-thirds of annual returns fall?

• a.0% to 16%, which is the mean plus and minus eight points
• b.-4% to 20%, which is the mean plus and minus one standard deviation✓
• c.-12% to 12%, which is centered on zero rather than the mean
• d.-16% to 32%, which is the mean plus and minus two standard deviations

One standard deviation either side of the mean covers about 68% of outcomes: 8% - 12% = -4% and 8% + 12% = 20%. The range of -16% to 32% is two standard deviations, which covers about 95%, the range of -12% to 12% is centered on zero instead of the mean, and 0% to 16% uses the mean, 8%, as the spread.

A portfolio has a beta of 1.4. If the market is expected to fall 5%, by about how much is the portfolio expected to fall?

• a.7.0%, which is the beta of 1.4 times the 5% market decline✓
• b.3.6%, which divides the market decline by the beta
• c.5.0%, which treats the portfolio as having a beta of 1.0
• d.1.4%, which treats the beta as a percentage of return

Beta measures sensitivity to the market, so the expected move is 1.4 x 5% = 7.0%. Dividing 5% by 1.4 gives 3.6%, which inverts the relationship; 5.0% would be a beta of 1.0; 1.4% confuses beta with a return.

Fund A returned 11% with a standard deviation of 15%. Fund B returned 9% with a standard deviation of 8%. The risk-free rate is 3%. Which fund has the better risk-adjusted return by the Sharpe ratio?

• a.Fund A, at 0.73, because its return is two points higher than Fund B's
• b.Neither, because the funds' ratios are equal once the risk-free rate is included
• c.Fund A, at 1.00, because its excess return of 8 points is the larger
• d.Fund B, at 0.75 against 0.53, as it earned more excess return per unit of risk taken✓

The Sharpe ratio is excess return over the risk-free rate divided by standard deviation. Fund A: (11 - 3) / 15 = 0.53. Fund B: (9 - 3) / 8 = 0.75. Fund B earned more excess return per unit of risk. A higher raw return does not rank higher unless risk is the same, and the ratios here are not equal.

A bond fund earned a nominal return of 7.5% in a year when inflation was 3%. About what was its real return?

• a.About 2.5%, which divides the nominal return by inflation
• b.About 7.5%, which ignores the effect of inflation
• c.About 4.5%, which is the nominal return less inflation✓
• d.About 10.5%, which adds inflation to the nominal return

The real return is approximately the nominal return less inflation: 7.5% - 3% = 4.5%. Adding the two gives 10.5%, which counts inflation as a gain, 2.5% divides the nominal return by the inflation rate, and 7.5% ignores the loss of purchasing power.

An investor holds a portfolio of large-cap US stock funds and wants to lower its overall volatility. Which addition is most likely to do that?

• a.A fund of stocks that has produced the highest return of any fund in the past year
• b.A second large-cap fund holding almost the same companies as the existing funds
• c.A leveraged fund that moves two times as much as the existing holdings
• d.A Treasury bond fund whose returns have a low correlation with those of the stock holdings✓

Volatility is reduced most by assets that do not move together with the portfolio, so a low correlation matters more than a high return. Adding a near copy of the holdings adds no diversification, the best recent performer says nothing about correlation, and a leveraged fund raises volatility.

A portfolio is 60% in a stock fund with an expected return of 9% and 40% in a bond fund with an expected return of 4%. What is the portfolio's expected return?

• a.6.5%, which is the simple average of the two returns
• b.6.0%, which swaps the weights of the two funds
• c.7.0%, the weighted average of the two expected returns✓
• d.13.0%, which adds the two expected returns

The expected return is the weighted average: 0.60 x 9% + 0.40 x 4% = 5.4% + 1.6% = 7.0%. Using 6.0% swaps the weights, 6.5% is the simple average of the two returns, and 13.0% adds them.

An investor invests $300 a month for three months in a fund, buying at $10, $12 and $15 per share. What is the investor's average cost per share?

• a.$12.00, which is $900 divided by the 75 shares bought✓
• b.$15.00, which is the price of the most recent purchase
• c.$12.33, which is the simple average of the three prices
• d.$12.50, which is the midpoint of the highest and lowest prices

The investor buys 30 shares, 25 shares and 20 shares, which is 75 shares for $900 in total, or $12.00 each. The simple average of the three prices is $12.33, which ignores that more shares were bought at the lower prices. $12.50 is the midpoint of the highest and lowest prices, and $15.00 is only the last price paid.

A bond fund has a duration of 6 years. If interest rates rise by 0.5 percentage points, by about how much is the fund's price expected to change?

• a.A decrease of about 3%, which is 6 times 0.5%✓
• b.An increase of about 3%, which gets the direction wrong
• c.A decrease of about 12%, which divides 6 by 0.5
• d.A decrease of about 0.5%, which ignores the duration

Duration estimates the percentage price change for a one point change in yield, so 6 x 0.5% = 3%, and the price moves in the opposite direction of rates. A rise of 3% gets the direction wrong, 12% divides rather than multiplies, and 0.5% ignores duration.

An ETF's shares trade at $50.60 while its net asset value is $50.00 per share. What typically happens to bring the price back toward NAV?

• a.The fund manager buys back shares from the market until the price falls to $50.00
• b.The fund's board lowers the NAV to match the market price at the end of the day
• c.Authorized participants deliver a basket for new ETF shares and sell them✓
• d.The ETF redeems shares from any investor who asks at the $50.60 market price

When an ETF trades at a premium, an authorized participant can deliver the underlying basket to the ETF in exchange for new shares, then sell those shares at the higher price, which adds supply and pushes the price down toward NAV. NAV is set by the value of the holdings, not by the board. ETF shares are redeemed in large blocks by authorized participants, not at market price for individual investors.

A closed-end fund has a net asset value of $24.00 per share and trades at $22.20 in the market. What is the discount?

• a.92.5%, which is the market price as a share of the NAV
• b.8.1%, which measures the dollar gap against the market price
• c.1.8%, which is the dollar gap shown as a percentage
• d.7.5%, which is the dollar gap measured against NAV✓

The discount is measured against NAV: ($24.00 - $22.20) / $24.00 = 7.5%. Dividing by the market price gives 8.1%, 1.8% reports the dollar difference as a percentage, and 92.5% is the price as a percentage of NAV.

A representative holds written discretionary authority over a customer's mutual fund account, and the firm accepted the account as discretionary in writing. Which step does FINRA Rule 3260 still require?

• a.A principal approves the first discretionary trade in writing, and the authorization then covers later orders
• b.The customer countersigns a confirmation of each discretionary trade within ten days after its trade date
• c.A principal examines the account only when the customer's investment profile is next updated, every 36 months
• d.A principal approves each discretionary order promptly in writing and reviews the account at frequent intervals✓

Written authority from the customer is only the starting point. Rule 3260(c) has the firm, through a principal or designee, approve each discretionary order promptly in writing and review all discretionary accounts at frequent intervals, because the representative is exercising judgment without asking the customer first. Customer countersignature of each trade would defeat the purpose of discretion and is not the rule. A review tied to the 36-month account-record cycle is far too infrequent. Approving only the first trade ignores the order-by-order approval requirement.FINRA Rule 3260(c)

A 16-year-old earned $4,200 mowing lawns in 2026 and has no other income. Her parent opens a custodial Roth IRA for her. If she is otherwise eligible, what is the most that can be contributed for her for 2026?

• a.$4,200, because the limit is her compensation whenever that is less than the dollar limit✓
• b.$7,500, the full annual limit, because a parent may fund the account whatever the child earned
• c.$0, because a minor cannot own an IRA even when a parent acts as custodian for her
• d.$3,300, which is the dollar limit reduced by the amount she earned from the lawn work

An IRA contribution cannot exceed the owner's taxable compensation for the year, so the limit is the lesser of compensation or the 2026 limit of $7,500; here that is $4,200. The money can come from the parent, but the cap is still her earnings. The full limit would apply only to someone with at least $7,500 of compensation. Subtracting her earnings from the limit has no basis in the rules. A minor with earned income can have an IRA; a parent serves as custodian until she reaches the age of majority.IRC Sections 219(b)(1) and 408A(c)

Two parents want one UTMA account for their twin sons, naming both parents as co-custodians. How should the firm respond?

• a.Open it with the mother as sole custodian for both boys and split the income between them on the Form 1099
• b.Open it as requested, because the twins are siblings and can share one account and one taxpayer identification number
• c.Open it in both parents' names as joint custodians, so that either one may sign on the account alone
• d.Explain that each custodianship has one minor and one custodian, so each twin needs his own account✓

Under the Uniform Transfers to Minors Act, custodial property is held for one minor by one custodian, and the minor is the owner and taxpayer under his own Social Security number. Each son therefore needs his own account, and each account has a single custodian who can be named with a successor. Combining the boys, adding a co-custodian, or splitting income on one tax form all treat the account as something the Act does not create.Uniform Transfers to Minors Act (state enactments)

A firm opens a brokerage account for a closely held corporation. Under FINRA Rule 4512, which item must the firm obtain for this entity account?

• a.The name of each person authorized to act for the corporation, listed on the account record✓
• b.The signature of every shareholder on the account agreement, acknowledging the investment risks
• c.Three years of audited financial statements, kept in the corporation's account file
• d.A personal guarantee from the corporation's president covering any account losses

For an entity account, Rule 4512 requires the firm to obtain the name of each person authorized to transact business for the entity, along with the other basic account information and a principal's signature accepting the account. Shareholder signatures are not part of that rule; the corporation acts through its authorized officers. Audited statements and personal guarantees are credit or business decisions a firm may make, but the rule does not require either.FINRA Rule 4512(a)(1)

A customer asks to use money in her Traditional IRA to pay premiums on a whole life insurance policy. How should the representative respond?

• a.Allow it as a tax-free Section 1035 exchange of the IRA assets into the new life policy
• b.Allow it as long as the annual premium does not exceed the yearly IRA contribution limit
• c.Allow it if the IRA is named as both the owner and the beneficiary of the policy being bought
• d.Explain that IRA money cannot buy life insurance, although an annuity contract can be held in an IRA✓

The Internal Revenue Code provides that no part of the trust funds of an IRA may be invested in life insurance contracts. Naming the IRA as owner and beneficiary does not change that. Section 1035 covers exchanges of insurance and annuity contracts, not the movement of IRA money into a policy. A premium capped at the contribution limit is still a prohibited investment. Annuity contracts are allowed in an IRA, which is why the correct answer separates the two.IRC Section 408(a)(3)

A registered representative at Firm A wants to open a personal account at Firm B, another broker-dealer, to trade individual stocks. What does FINRA Rule 3210 require?

• a.Firm B's written consent alone, because the executing firm is the only one that supervises the account
• b.Firm A's prior written consent, plus his written notice to Firm B of his association with Firm A✓
• c.FINRA's written approval of the account, and then Firm A's notice to Firm B on the representative's behalf
• d.Written notice to Firm A within 30 days after the account opens, with no consent needed from Firm A

Rule 3210 requires the associated person to obtain the employer member's prior written consent before opening the account and to tell the executing member in writing, before opening it, that he is associated with the employer. The 30-day period applies only to accounts that already existed when the person became associated. FINRA does not approve individual accounts, and the executing firm's consent alone does not satisfy the employer's right to know. Accounts limited to fund shares, unit investment trusts, and similar products are treated differently, which is why the question uses individual stocks.FINRA Rule 3210

An adult daughter asks to take over trading in her father's account after a court appointed her his conservator because of dementia. What should the firm obtain first?

• a.A letter from his physician confirming the diagnosis, which the firm may accept in place of the court order
• b.The daughter's own statement of income and net worth, since the account will be reopened in her name
• c.A certified copy of the court order appointing her, so the firm can confirm her authority and its scope✓
• d.A new power of attorney signed by the father, with his signature witnessed by two of the firm's employees

A conservator's authority comes from the court, so the firm needs a certified copy of the order to know who may act and what the appointment permits; Rule 2090 requires the firm to know the authority of each person acting for a customer. A power of attorney the father signed after losing capacity would not be valid. A physician's letter proves a medical condition, not legal authority. The account stays in the father's name, so the daughter's finances are not the issue.FINRA Rule 2090

A representative with written discretion moves an $80,000 customer account among four fund families three times in a year, each time paying a front-end load, with no change in the customer's objectives. What is the problem?

• a.It is a violation only if the representative personally keeps more than 5% of the commissions
• b.None, because written discretionary authority lets the representative make any trade he considers appropriate
• c.The trading may be excessive in frequency for the account, which Rule 3260(a) prohibits despite the discretion granted✓
• d.It is a violation only if the customer files a written complaint about the account's trading

Rule 3260(a) bars transactions in a discretionary account that are excessive in size or frequency in light of the account's financial resources and character. Repeated switching that generates new sales charges without a change in the customer's needs is a classic example, and the grant of discretion does not excuse it. The rule is violated by the pattern of trading itself, not by a complaint or by a specific share of the commissions kept by the representative.FINRA Rule 3260(a)

A customer owns a $450,000 home with no mortgage, $280,000 in investments, and $40,000 in savings, and has no debts. What net worth belongs on the account record under SEC Rule 17a-3?

• a.$280,000, which counts only the investment assets and leaves out the cash
• b.$40,000, which counts only the cash that is immediately available
• c.$320,000, because the value of the primary residence is excluded✓
• d.$770,000, which counts the home along with the investments and savings

The account record asks for net worth excluding the value of the primary residence. Here that is $280,000 of investments plus $40,000 of savings, or $320,000. Including the house gives $770,000. Counting only the investments, or only the cash, understates the figure because net worth covers all assets less liabilities apart from the home.17 CFR 240.17a-3(a)(17)(i)(A)

A new customer declines to give her annual income and net worth for the account record. Under SEC Rule 17a-3, what does the missing information mean for the firm?

• a.The firm must enter estimates for both figures based on the representative's judgment
• b.The firm must refuse to open the account until she supplies both figures
• c.The firm is excused from obtaining it because the customer refused to provide it✓
• d.The firm may open the account only as a cash account limited to money market funds

The account-record rule provides that a customer's neglect, refusal, or inability to provide required information excuses the firm from obtaining it. The firm is not required to turn away the customer, and it should not invent figures and record them as if the customer had supplied them. The rule does not restrict the account to money market funds. Other obligations, such as Regulation Best Interest, still require the representative to consider the information that is available before recommending anything.17 CFR 240.17a-3(a)(17)(i)(C)

A customer telephones to change her account's stated investment objective from income to growth. What must the firm do under SEC Rule 17a-3?

• a.Send her and her representative a copy of the updated record within 30 days of receiving notice✓
• b.Obtain her signed approval before the change takes effect, and send nothing to her afterward
• c.Wait for the next 36-month mailing, because no earlier copy of the record is needed by anyone
• d.Send notice of the change only to her old address, the way a change of address is handled

When an account's investment objectives change, the firm must furnish a copy of the updated account record to each customer and to the associated person responsible, on or before the 30th day after it receives notice of the change. That is separate from the address-change notice, which goes to the old address, and from the periodic 36-month mailing. A signed pre-approval is not what the rule demands; the copy gives the customer a chance to correct the record.17 CFR 240.17a-3(a)(17)(i)(B)(3)

A customer provides a trusted contact person when opening an account. What must the firm give the customer under FINRA Rule 4512?

• a.A request to verify the trusted person's age with government photo identification kept for six years
• b.Written disclosure that the firm may contact the trusted person about possible exploitation✓
• c.A commitment that duplicate confirmations and statements will be mailed to the trusted person each quarter
• d.A power of attorney form, which the trusted person signs so that the firm may act on that person's instructions

Supplementary Material .06 to Rule 4512 requires the firm to disclose in writing that it is authorized to contact the trusted person and disclose information to address possible financial exploitation, to confirm contact information, and for certain other purposes. A trusted contact has no authority to transact or to receive statements, so a power of attorney or duplicate mailings misdescribe the role. The rule does not call for photo identification retained for six years.FINRA Rule 4512.06

A representative believes a 78-year-old customer's caregiver is pressuring her into wire transfers. The firm places a temporary hold on a disbursement under Rule 2165. What must follow?

• a.Notice to authorized parties and the trusted contact, generally within two business days, and an internal review✓
• b.Notice to the caregiver alone, since the caregiver is the person who has been handling the wires
• c.Written consent from the customer within two business days, or the firm must lift the hold at once
• d.Notice to FINRA beforehand, with the hold taking effect only after FINRA approves it in writing

Rule 2165 lets a firm place a temporary hold when it reasonably believes financial exploitation of a specified adult has occurred, is occurring, or will be attempted. After placing the hold, it must notify all parties authorized to transact on the account and the trusted contact, if one exists and is not suspected, within two business days, and promptly begin an internal review. FINRA approval and customer consent are not conditions of the hold. Telling only the suspected caregiver would defeat the purpose.FINRA Rule 2165(b)

A new customer opening an individual account gives only a post office box as her address. For the firm's customer identification program, what should the firm obtain?

• a.Her employer's P.O. box, which the rule treats the same way as a residential address
• b.A recent utility bill, which substitutes for the address the firm would otherwise collect
• c.Nothing further, because any mailing address meets the address element for an individual customer
• d.A residential or business street address, since a P.O. box alone does not qualify✓

The customer identification program rule requires, for an individual, a residential or business street address. A person with no street address may instead give an APO or FPO box number or the street address of next of kin or another contact individual, but a P.O. box does not satisfy the element. An employer's box does not help, and a utility bill might be a way to verify an address; it does not replace collecting one.31 CFR 1023.220(a)(2)

A customer opens an account only to buy open-end fund shares, and the firm will make no recommendations. Which statement about FINRA Rule 4512 is correct?

• a.Every item in the rule applies in full, because every broker-dealer account needs the same information on file
• b.Only the trusted contact requirement is waived, while all of the other items remain required
• c.Every item in the rule is waived, including the customer's name, residence, and legal age
• d.The reasonable-efforts items such as occupation and employer do not apply to this kind of account✓

Rule 4512(a)(2) lists additional information the firm must make reasonable efforts to obtain, including occupation, employer, and whether the customer is associated with another member. By its terms, that list excludes accounts in which investments are limited to open-end fund shares that are not recommended by the firm or its associated persons. The basic items, such as name, residence, legal age, and the trusted contact request, are not excluded.FINRA Rule 4512(a)(2)

A customer has held an account for five years and has placed every order herself, with no recommendations from the firm. Must the firm keep sending her the 36-month account record?

• a.No, but only if the customer waives the mailing in writing and the waiver is renewed every year
• b.Yes, but the firm must send it each year instead, because the account is self-directed
• c.Yes, every natural person's account must receive the record at least once every 36 months, with no exceptions
• d.No, because the requirement does not apply when no suitability determination was required in 36 months✓

The furnishing requirement in Rule 17a-3(a)(17) does not apply to an account for which, within the last 36 months, the firm has not been required to make a suitability determination under the federal securities laws or an SRO rule. A self-directed account with no recommendations fits that description. The record is not sent annually, and no written waiver is needed because the rule itself removes the obligation. Once the firm recommends something again, the requirement returns.17 CFR 240.17a-3(a)(17)(i)(D)

A firm receives a letter from an attorney for one of its customers, alleging that a representative made unauthorized trades in the customer's account. Under FINRA Rule 4513, the letter is:

• a.A customer complaint, since a person acting for the customer alleges misconduct in the trades at issue✓
• b.Not a complaint until the customer personally signs it, because an attorney's letter is only an informal request
• c.A complaint only after the firm finishes investigating and concludes that the trades were in fact unauthorized
• d.Not a complaint unless it demands a stated dollar amount in compensation for the losses

Rule 4513(b) defines a customer complaint as any grievance by a customer, or by any person authorized to act for the customer, involving the activities of the member or an associated person in connection with the solicitation or execution of a transaction or the disposition of the customer's securities or funds. An attorney writing for the customer is such a person, and an allegation of unauthorized trading falls squarely inside that definition. The customer does not have to sign personally, so the letter is not a mere information request. The definition contains no minimum dollar demand. The firm's own view of the merits is also irrelevant, because the rule counts the grievance itself and not whether it later proves justified.FINRA Rule 4513(b)

Earlier this year a customer had her mail held for two months while she was abroad. Right after that hold ended, she asks the firm in writing to hold it two more months because she prefers not to receive paper at home. Under FINRA Rule 3150, the firm:

• a.Needs a reason such as safety or security, since the holds total over three months and convenience does not count✓
• b.May hold it if a principal approves the request and records convenience as the only reason
• c.May hold it on her written request, because each request on its own stays within the three-month limit, so earlier hold periods are not counted against it
• d.May hold it for one more month only, since three months in total is the most that any customer's mail may be held, whatever reason the customer gives

Rule 3150(a)(1) lets a firm hold mail on written instructions that state the time period. If the requested period is longer than three consecutive months, counting any aggregation of periods from prior requests, the instructions must include an acceptable reason, for example safety or security, and convenience is expressly not acceptable. Two months plus two months is four, so the aggregated period passes the threshold and her stated preference does not qualify. Looking at each request alone is the error the aggregation language prevents. Three months is not an absolute cap, because a longer hold is allowed with an acceptable reason. Principal approval cannot turn convenience into an acceptable reason.FINRA Rule 3150(a)(1)

A customer telephones an order at 10:02 a.m., the representative enters it at 10:05, and it executes at 10:09. Under SEA Rule 17a-3(a)(6), what must the order memorandum show?

• a.The 10:02 receipt and 10:09 execution times, but not entry time, which is only an internal detail of the system
• b.Only the 10:09 execution time, because the time of receipt is needed only when an order is later modified
• c.The 10:02 receipt and 10:05 entry times, plus the 10:09 execution time to the extent that it is feasible✓
• d.Only the 10:05 entry time, since an order is not received by the firm until it is entered

The memorandum of each brokerage order must show the terms and conditions, the account, the time the order was received, the time of entry, and the price at which it was executed, and, to the extent feasible, the time of execution or cancellation. Receipt and entry are separate required times, so the 10:02 call and the 10:05 entry both appear. Treating entry as receipt would erase the gap that supervisors use to look for delays or after-the-fact tickets. Entry time is a required item, not an optional system detail. Receipt time is required for every order, not only modified ones.SEA Rule 17a-3(a)(6)

Two days after a mutual fund customer's address of record is changed, the firm receives a request to add an authorized user with online access. Under the firm's Regulation S-ID identity theft program, this sequence is:

• a.Outside Regulation S-ID, which covers lending and credit card accounts but not brokerage or mutual fund accounts
• b.Routine activity, because adding an authorized user is an ordinary service request that needs no added verification step
• c.A red flag under Regulation S-ID, so the firm should verify the request through contact information on file✓
• d.A red flag only if the request arrives by mail, since a request made online is presumed to come from the customer

The guidelines in Appendix A to Regulation S-ID list, as a red flag, a request for a new, additional or replacement means of accessing a covered account, or for an added authorized user, shortly after a notice of change of address. Appropriate responses include contacting the customer and monitoring the account, and the program should address verifying change-of-address requests on existing accounts. Treating it as routine ignores the pattern that account-takeover fraud commonly follows. Online requests are not presumed genuine. The rule is not limited to credit cards: its definition of account expressly includes brokerage accounts and mutual fund accounts.17 CFR 248.201 and Appendix A (Red Flag 19)

A customer signs a separate letter authorizing the firm to submit drafts drawn on her bank account for fund purchases. Under FINRA Rule 4514, how long must the firm preserve that letter?

• a.Three years after the date the authorization expires, rather than from the date it was signed✓
• b.Three years after the date she signed it, because the retention clock starts when a record is made
• c.Four years after the last draft was submitted, the same period that applies to complaint records
• d.No set period, since no record of a separate authorization is required once the draft clears

Where the written authorization is separate from the negotiable instrument, Rule 4514 requires the member to preserve it for three years following the date the authorization expires, so the clock starts at expiration and not at signing. Counting from the date she signed it starts the clock too early for an authorization that stays in use. Four years is the period for complaint records under Rule 4513, a different rule. The rule does require the separate authorization to be kept, although it does not require copies of the signed drafts themselves.FINRA Rule 4514

A firm agrees to hold a customer's mail for six weeks while he travels and has his written instructions stating that period. Which additional step does FINRA Rule 3150 require?

• a.Sending a copy of each held statement to his representative so that she can keep him informed
• b.Having a principal open and log each held item so the firm can later show that no mail was lost
• c.Restricting the account to closing transactions until the customer returns and the hold ends
• d.Telling him in writing of other ways to monitor the account, such as email, and getting his confirmation✓

Rule 3150(a)(2) requires the firm to tell the customer in writing about alternate methods of receiving or monitoring account activity, such as email or website access, and to obtain his confirmation that he received that information. It must also verify at reasonable intervals that his instructions still apply. Opening his mail would work against the rule, which requires safeguards so that held mail is not tampered with. Nothing in the rule restricts trading in the account during the hold. Routing statements to the representative is the kind of use of held mail by an associated person that Rule 3150(c) is meant to prevent.FINRA Rule 3150(a)(2) and (c)

A shareholder owns 800 fund shares and has elected automatic reinvestment. The fund pays $0.45 per share, its maximum front-end load is 5.00%, and the prospectus says distributions are reinvested at NAV without a sales charge. If the NAV on the reinvestment date is $24.00, how many shares does she receive?

• a.15.29 shares, using NAV less the $0.45 payout
• b.15.00 shares, from $360 of distributions at NAV✓
• c.14.25 shares, after a 5.00% load on $360
• d.10.80 shares, from the payout times the NAV

The distribution is 800 x $0.45 = $360. Reinvestment is at NAV with no sales charge, so the shares received are $360 / $24.00 = 15.00. Applying the 5.00% load would give $342 / $24.00 = 14.25 shares, but the prospectus waives it for reinvestment. Dividing by NAV less the payout, $360 / $23.55 = 15.29, uses a price that is not the reinvestment price stated. Multiplying the per-share dividend by NAV, 0.45 x 24 = 10.80, is not a share count for this purchase.17 CFR 270.22d-1 and the fund prospectus

A customer's systematic withdrawal plan redeems $1,500 of fund shares at an NAV of $15.00. She bought the redeemed shares three years ago at $13.00 per share. What is the tax result of this withdrawal?

• a.A $200 long-term capital gain, the proceeds less the cost of the 100 shares redeemed✓
• b.No tax until withdrawals exceed the $1,300 cost of the shares, and then every dollar is taxable
• c.A $200 short-term capital gain, since each plan payment is treated as a new redemption of shares
• d.$1,500 of ordinary income, since a withdrawal plan pays out as a dividend would

A systematic withdrawal plan sells shares, so each payment is a redemption. $1,500 / $15.00 = 100 shares. Their cost was 100 x $13.00 = $1,300, so the gain is $1,500 - $1,300 = $200, and because the shares were held more than one year it is long-term. Only the gain is taxed, not the whole payment, so ordinary income on $1,500 is wrong. Recovering principal first is not how fund redemptions are taxed, because each sale is measured against the cost of the shares redeemed. The holding period is that of the shares sold, not the date of the plan payment.IRC Sections 1001 and 1222(3)

A shareholder's $360 of cash dividends buys 10 shares through a corporation's dividend reinvestment plan at $36 per share. The shares' fair market value on the dividend payment date is $40. What is the tax treatment?

• a.$360 of dividend income, and the $40 discount is a gain taxed when sold
• b.$360 of dividend income, with the shares' basis also $360
• c.$400 of dividend income, which becomes the shares' basis as well✓
• d.$400 of dividend income, but the shares' basis is only the $360 paid

When a dividend reinvestment plan sells stock at less than fair market value, the shareholder reports as dividend income the fair market value of the additional stock on the dividend payment date: 10 x $40 = $400, which is the $360 dividend plus the $40 discount. The basis is the same $400. Reporting only the cash dividend ignores the discount. Reporting $400 as income and keeping a $360 basis would tax the same $40 twice, once now and again on sale. Deferring the discount to the sale date contradicts the rule that it is income when the shares are received.IRS Pub. 550, Dividends Used To Buy More Stock; DRIPs

A customer bought 100 fund shares on January 5, 2025. A distribution reinvested on December 15, 2025 bought 5 more shares. On March 10, 2026 she sells all 105 shares at a gain. How is the gain treated?

• a.Long-term on the 100 original shares and short-term on the 5 shares bought by reinvestment✓
• b.Short-term on all 105 shares, since the last purchase was under a year before the sale
• c.Long-term on all 105 shares, since reinvested shares take the original holding period
• d.Short-term on the 100 originals and long-term on the 5, since the distribution was taxed in 2025

The holding period of each reinvested share begins the day after it is purchased. The original 100 shares were held more than one year on March 10, 2026, so their gain is long-term. The 5 reinvested shares were bought December 15, 2025 and held under one year, so their gain is short-term. Reinvested shares do not inherit the original holding period, and the most recent purchase does not reset the clock on earlier shares. The fact that the distribution was taxable in 2025 affects basis, not the holding period.IRS Pub. 550, Reinvested distributions (holding period)

A shareholder's systematic withdrawal plan pays $1,000 a month. The fund's NAV is $25.00, $20.00 and $16.00 on the three redemption dates. How many shares does the plan redeem over the three months?

• a.120 shares, from $3,000 divided by the starting NAV of $25
• b.147.54 shares, from $3,000 divided by the $20.33 average NAV
• c.152.5 shares, from summing each month's $1,000 divided by that month's NAV✓
• d.187.5 shares, from $3,000 divided by the lowest NAV of $16

Each month redeems $1,000 / NAV: $1,000 / $25 = 40 shares, $1,000 / $20 = 50 shares, and $1,000 / $16 = 62.5 shares, for a total of 152.5. A fixed dollar withdrawal redeems more shares when the price is lower, which is why a withdrawal plan can drain an account faster in a falling market. Dividing the total by the simple average price gives 147.54, which understates the shares because the average ignores that more shares are sold at low prices. Using only the starting price or only the lowest price assumes the NAV never changed.Fund prospectus (systematic withdrawal plan); IRC Section 1001

A customer sells 200 fund shares at a loss of $3.00 per share, a $600 loss. Ten days later, automatic reinvestment of a distribution buys 10 shares of the same fund. How much of the loss is disallowed?

• a.$570, which is the loss on the 190 shares that were not replaced by the purchase
• b.$0, because shares bought by reinvestment are not purchases by the investor
• c.$30, the loss on the 10 shares replaced, which adds to the basis of the new shares✓
• d.$600, because any purchase within 30 days of the sale disallows the whole loss

A wash sale occurs when substantially identical shares are bought within 30 days before or after a sale at a loss, and the reinvested shares are a purchase. When fewer shares are bought than sold, the loss is disallowed only on the number of shares bought: 10 x $3.00 = $30. That disallowed amount is added to the basis of the 10 new shares, and the other $570 of the loss is deductible. Disallowing the whole $600 ignores the matching rule. Treating reinvestment as a non-purchase would let investors use plans to avoid the rule. The 190 unreplaced shares are exactly the shares whose loss is allowed.IRC Section 1091; IRS Pub. 550, Wash Sales

A fund keeps $1,000 of long-term capital gains allocable to a shareholder and pays $210 of tax on it for her, as shown on Form 2439. How does this change her basis in the fund shares?

• a.It rises by $1,000, the full amount of gain she must include in income
• b.It does not change, because the fund sent her no cash or new shares
• c.It rises by $210, the amount of tax the fund paid on her behalf
• d.It rises by $790, the gain she reports less the tax credit✓

A shareholder of a fund that keeps its long-term gains reports her share as a long-term capital gain and claims a credit for the tax the fund paid on it, both shown on Form 2439. Her basis increases by the gain reported less the credit: $1,000 - $210 = $790. Adding the full $1,000 ignores that $210 of it went to the government rather than staying invested for her. Leaving basis unchanged would tax the same gain a second time when she later sells. Adding only the $210 mixes up the credit with the net amount the fund retained.IRS Pub. 550, Undistributed capital gains of mutual funds and REITs (Form 2439)

A customer buys 1,000 shares of a municipal bond fund at $50. Four months later, after receiving $1,200 of exempt-interest dividends, she sells at $47. How much of her $3,000 loss can she deduct?

• a.$3,000, since the exempt-interest dividends were never taxed and so do not affect the loss
• b.$1,200, the amount of the exempt-interest dividends she received while she held the shares
• c.$1,800 as a short-term loss, because the $1,200 of dividends reduces the loss✓
• d.$4,200, because the tax-free dividends are added to the loss she suffered

When fund shares held six months or less are sold at a loss, the loss is disallowed to the extent of exempt-interest dividends received on them. Her loss is 1,000 x ($50 - $47) = $3,000, and $3,000 - $1,200 = $1,800 is deductible. It is short-term because she held the shares under a year. Deducting the full $3,000 would let her receive tax-free income and also deduct the decline that income offset. The $1,200 is the disallowed part, not the deductible part. Adding the dividends to the loss runs the rule in the wrong direction.IRC Section 852(b)(4)(B); IRS Pub. 550, Exempt-interest dividends on mutual fund stock

To be qualified to pay exempt-interest dividends, a regulated investment company must hold at least what portion of its total assets in tax-exempt municipal obligations at the close of each quarter?

• a.At least 75%, the share of assets a REIT must hold
• b.At least 90%, the share of income a fund must distribute
• c.At least 80%, the share set by the fund-naming rule
• d.At least 50% of the value of the fund's total assets✓

Under the Internal Revenue Code, a regulated investment company can pay exempt-interest dividends only if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of tax-exempt municipal obligations. The 80% figure belongs to a different rule, the one that requires a fund whose name suggests a particular type of investment to invest at least 80% in that type. The 90% figure is the share of investment company taxable income a fund must distribute to be taxed as a regulated investment company, which is a distribution test and not an asset test. The 75% figure is the real estate asset test for a REIT, an entity with different qualification rules.IRC Section 852(b)(5)

A shareholder owns 1,000 fund shares. Per share, the fund distributes $0.30 of net investment income, $0.20 of net short-term gains and $0.50 of net long-term gains. How is the $1,000 reported on Form 1099-DIV?

• a.$300 of ordinary dividends, $200 of short-term capital gain and $500 of long-term capital gain
• b.$300 of ordinary dividends and $700 of capital gain distributions, since all gains are long-term
• c.$1,000 of ordinary dividends, because every fund payout is simply an ordinary dividend
• d.$500 of ordinary dividends and $500 of capital gain distributions, taxed as long-term✓

A mutual fund's net realized short-term gains are not treated as capital gain distributions. They are reported as ordinary dividends along with net investment income, so ($0.30 + $0.20) x 1,000 = $500 is ordinary dividends. Only the net long-term gains of ($0.50 x 1,000) = $500 are capital gain distributions, taxed as long-term gain. Calling every gain a capital gain distribution would put the short-term gain at long-term rates it does not earn. Treating the entire amount as ordinary dividends ignores the long-term character a fund passes through. Splitting out a separate short-term gain category misreads the form, which has no such box for fund distributions.IRS Pub. 550, Capital gain distributions; IRC Section 852(b)(3)

A customer's basis in her fund shares is $1,200 and she has held them for years. The fund pays $1,500 that Form 1099-DIV reports as a nondividend distribution in box 3. What is the tax result?

• a.She reports $300 as ordinary dividend income and basis falls to zero
• b.She reports a $300 long-term capital gain and her basis falls to zero✓
• c.She reports nothing now, and her basis becomes a negative $300 carried forward
• d.She reports $1,500 of ordinary dividend income and her basis stays at $1,200

A nondividend distribution is a return of capital. It is not taxed when received, and it reduces basis, but only until basis reaches zero. Here $1,200 of the $1,500 reduces basis to zero, and the extra $300 is reported as a capital gain, long-term because she held the shares more than a year. Treating the whole $1,500 as ordinary dividends ignores that box 3 is a return of her own money. Basis cannot go below zero, so a negative basis carried forward is not allowed. The excess is a capital gain, not an ordinary dividend, because it is the sale-type gain on her investment rather than fund earnings.IRS Pub. 550, Nondividend distributions (Form 1099-DIV, box 3)

A fund declares a dividend on December 15, payable to shareholders of record on December 29. The fund pays it on January 20. In which tax year does a cash-basis shareholder report the dividend?

• a.The year declared, because it is treated as received on December 31 of that year✓
• b.The year declared only if the fund pays it by December 31, and otherwise the year paid
• c.Either year, whichever the shareholder chooses when filing the return
• d.The year paid, because a cash-basis taxpayer reports income only when the money arrives

If a mutual fund declares a dividend in October, November or December, payable to shareholders of record on a date in one of those months, and pays it in January of the next year, the shareholder is treated as having received it on December 31 and reports it in the year it was declared. The cash-basis rule is overridden for this case, so waiting for the money does not move the income. The rule does not depend on payment by December 31, since late payment in January is exactly the situation it covers. The shareholder has no election to choose the year.IRS Pub. 550, Dividends received in January

A mother bought 100 fund shares at $10 three years ago and gave them to her son when they were worth $18. He sells them two months later at $20. How is his gain taxed?

• a.$200 long-term, measured from the $18 value but using the mother's holding period
• b.$1,000 short-term, because his own holding period began on the day after the gift
• c.$200 short-term, measured from the $18 value on the date of the gift
• d.$1,000 long-term, with his basis and holding period carried over from his mother✓

When a gift is sold at a gain, the recipient takes the donor's adjusted basis, here $10, and the holding period also carries over from the donor. The gain is ($20 - $10) x 100 = $1,000, and the mother's three years make it long-term. The $18 gift-date value matters only for figuring a loss, and only when it is below the donor's basis. Restarting the holding period at the gift applies only when basis is determined by fair market value, which is not the case here. Using the $18 value for a gain would understate the gain, and pairing it with the mother's holding period mixes two rules that never go together.IRS Pub. 550, Property received as a gift (basis and holding period)

A customer wants to make a 2026 traditional IRA contribution. By what date must it be made to count for 2026, even if she files for an extension of her tax return?

• a.December 31, 2026, the last day of the 2026 tax year
• b.October 15, 2027, the extended due date of the return
• c.April 15, 2027, the due date of the return without extensions✓
• d.April 15, 2027 only if she has already filed her 2026 return

IRA contributions for a tax year can be made any time during the year and up to the due date for filing that year's return, not including extensions. For 2026 that is April 15, 2027. An extension of time to file does not extend the contribution deadline, so October 15 is too late. Waiting until after December 31 is allowed, so that date is too early. Filing the return first is not a condition, although she should tell the custodian which year the contribution is for.IRS Pub. 590-A, When Can Contributions Be Made

A married couple under age 50 files jointly. Only the husband works, earning $9,000, and he puts $7,500 into his own IRA for 2026. What is the most his wife can contribute to her own IRA for 2026?

• a.$1,500, which is the couple's compensation less his IRA contribution✓
• b.$0, because a spouse with no compensation cannot contribute at all
• c.$9,000, the husband's compensation reported on the joint return
• d.$7,500, the full 2026 IRA limit, since each spouse has a separate limit

Under the spousal IRA rule, a non-working spouse may contribute up to the smaller of the regular limit ($7,500 for 2026, under age 50) or the couple's combined compensation less the working spouse's IRA contributions. Here $9,000 - $7,500 = $1,500, which is smaller than $7,500. The separate-limits idea ignores the compensation cap on the couple's combined deposits. The $9,000 figure forgets to subtract his contribution. A spouse without income is exactly who the rule allows to contribute, so $0 is wrong.IRS Pub. 590-A, Kay Bailey Hutchison Spousal IRA limit; IRS 2026 limits notice (IRA limit $7,500)

A customer has $20,000 of basis from nondeductible IRA contributions. At year end her traditional IRAs are worth $90,000 after she withdrew $10,000 during the year. How much of the withdrawal is taxable?

• a.$7,778, found by dividing basis by the year-end value alone
• b.$0, since the first $10,000 withdrawn comes out of her basis
• c.$8,000, because 20% of the withdrawal is a tax-free return of her basis✓
• d.$10,000, because every IRA distribution is taxed as ordinary income

Withdrawals from an IRA with nondeductible basis are partly taxable. The tax-free fraction is total basis divided by the year-end IRA value plus the year's distributions: $20,000 / ($90,000 + $10,000) = 20%. So 20% x $10,000 = $2,000 is tax-free, and the remaining $8,000 is taxable. Basis does not come out first, so the tax-free amount is not the whole withdrawal. Ignoring basis taxes all $10,000. Dividing basis by the year-end value alone gives 22.2%, and $7,778 results, which omits the distributions from the denominator.IRS Pub. 590-B, Worksheet 1-1 (nondeductible contributions, pro rata rule)

A single IRA owner turns 77 this year. His traditional IRA was worth $458,000 on December 31 of last year. Using the Uniform Lifetime Table divisor of 22.9 for age 77, what is his required minimum distribution?

• a.$17,283, found by using the age 73 factor of 26.5
• b.$20,000, found by dividing $458,000 by 22.9✓
• c.$20,818, found by using the age 78 factor of 22.0
• d.$22,900, found by reading the divisor as dollars

The RMD is the prior December 31 account balance divided by the distribution period for the owner's age this year. At 77 the factor is 22.9, so $458,000 / 22.9 = $20,000. Using the age 73 factor of 26.5 gives $17,283 and understates the amount, and the age 78 factor of 22.0 gives $20,818, which overstates it. Both reach the wrong figure by picking the wrong row of the table. Reading the divisor as dollars confuses a factor with an amount.IRS Pub. 590-B, Table III (Uniform Lifetime); IRC Section 401(a)(9)