FINRA Series 6 — All Questions

An IRA owner born in 1953 reaches age 73 in 2026 and chooses to delay his first RMD, for 2026, until April 1, 2027. By when must he take his RMD for 2027?

• a.April 1, 2028, since each RMD may be delayed until the next April 1
• b.December 31, 2027, the same year as the delayed first RMD✓
• c.December 31, 2028, one year after the year it is for
• d.April 1, 2027, because both RMDs are due on the delayed date

The April 1 extension applies only to the first RMD, the one for the year the owner reaches the applicable age. The RMD for each later year must be taken by December 31 of that year. Delaying the first one therefore means two RMDs in 2027: the 2026 amount by April 1 and the 2027 amount by December 31. Pushing every RMD to the next April 1 is not allowed. Making both due on April 1 would shorten the 2027 deadline. Waiting until the end of 2028 would skip the 2027 requirement entirely.IRS Pub. 590-B, When Must You Withdraw Required Minimum Distributions

An owner is 76. Last December 31 her two traditional IRAs held $300,000 and $200,000, and the Uniform Lifetime divisor for her age is 23.7. What must she withdraw for the year?

• a.$12,658, figured on the larger IRA alone with the smaller one left out
• b.$10,549 in total, found by averaging the two accounts' separate RMDs
• c.$21,097 in total, taken from either IRA or split between them as she chooses✓
• d.$21,097 in total, but with $12,658 taken from the first and $8,439 from the second

An owner with several traditional IRAs figures the RMD for each separately and may then take the total from any one or more of them. The total is $300,000 / 23.7 + $200,000 / 23.7 = $12,658 + $8,439 = $21,097. Requiring each account to supply its own share is wrong, because the totals can be pooled. Using only the larger IRA drops $8,439 of the requirement. Averaging the two amounts understates it by half the total.IRS Pub. 590-B, Multiple IRAs (aggregation of RMDs)

A single customer under age 50 is covered by a workplace plan and has 2026 modified AGI of $86,000. The deduction phase-out for her is $81,000 to $91,000. How much of a $7,500 traditional IRA contribution can she deduct?

• a.$0, because her income is above the bottom of the range
• b.$5,000, because only the $5,000 above the range start is disallowed
• c.$3,750, because she is halfway through the phase-out range✓
• d.$7,500, because her income is below the top of the range

Within the phase-out range the deduction shrinks in proportion to how far income has moved through it. Her income is $5,000 above $81,000, in a $10,000 range, so the reduction is $7,500 x $5,000 / $10,000 = $3,750, and the deduction is $7,500 - $3,750 = $3,750. The full deduction applies only below $81,000, and none applies at or above $91,000. Subtracting the dollars above the start of the range from the contribution is not the formula, since the reduction is a fraction of the limit.IRS Pub. 590-A, Worksheet 1-2; IRS 2026 limits notice (single, covered: $81,000-$91,000)

A single customer under age 50 has 2026 modified AGI of $157,500. The Roth IRA phase-out for single filers is $153,000 to $168,000. How much can she contribute to a Roth IRA for 2026?

• a.$3,750, because her income is halfway through the range
• b.$2,250, which is the reduction itself and not what remains
• c.$7,500, because her income is below the $168,000 top of the range
• d.$5,250, since 30% of the $7,500 limit is lost to the phase-out✓

Her income is $4,500 above $153,000 in a $15,000 range, so 30% of the limit is lost: $7,500 x $4,500 / $15,000 = $2,250. The allowed contribution is $7,500 - $2,250 = $5,250. The full limit is available only below $153,000. The $2,250 figure is the reduction, not what remains. The halfway answer would apply at an income of $160,500, which is not her situation.IRS Pub. 590-A, Worksheet 2-2; IRS 2026 limits notice (single Roth: $153,000-$168,000)

A customer's fund investment grows from $10,000 to $12,100 over exactly two years with no withdrawals or additions. What is her compound annual return?

• a.10.5% a year, found by dividing the 21% cumulative gain by two
• b.21.0% a year, since the gain on the original amount is 21%
• c.10.0% a year, since $10,000 growing at 10% for two years is $12,100✓
• d.11.0% a year, found by adding 1% for the effect of compounding

A compound annual return is the single yearly rate that turns the starting value into the ending value: $10,000 x 1.10 x 1.10 = $12,100, so the rate is 10%. Dividing the 21% cumulative gain by two ignores that the second year's gain is earned on a larger base. Quoting 21% as the yearly figure confuses a two-year total with a yearly rate. Adding a point for compounding has no basis in the calculation, because compounding is already inside the 10%.

A fund gains 20% in its first year and loses 20% in its second year. Compared with the starting amount, what is the investor's result after the two years?

• a.A 20% loss, since the second year's decline is the lasting result
• b.A 4% loss, because the 20% decline applies to a larger base✓
• c.No change, because the 20% gain and the 20% loss cancel
• d.A 4% gain, because the 20% gain came first and is the larger move

Returns multiply rather than add. A $10,000 investment becomes $12,000 after a 20% gain, and a 20% loss on that larger base takes away $2,400, leaving $9,600, or 4% below the start. The two percentages cancel only when added, and that is not how a holding grows. A 20% overall loss would require the second-year decline to apply to the original amount only. A gain is impossible here, because the dollar loss in year two exceeds the dollar gain in year one.

A customer is deciding between two funds with similar holdings. One has an expense ratio of 1.10% and the other 0.15%. On an $80,000 investment, about how much more does the higher-cost fund take each year?

• a.About $120 a year, the lower fund's whole 0.15% of $80,000
• b.About $880 a year, the higher fund's whole 1.10% of $80,000
• c.About $760 a year, the 0.95% gap applied to the $80,000✓
• d.About $1,000 a year, the two ratios added and rounded to 1.25%

The extra annual cost is the gap between the two ratios applied to the amount invested: 1.10% - 0.15% = 0.95%, and 0.95% x $80,000 = $760. The $880 figure is the higher-cost fund's whole expense, not the difference between the funds. The $120 figure is the lower fund's whole expense. Adding the two ratios counts the same investment's cost twice and then rounds up, and it answers a question nobody asked.

A married couple files a joint return. One spouse earns $90,000 and the other has no earned income. What applies to the nonworking spouse's IRA contribution?

• a.The nonworking spouse may contribute up to the annual limit, based on the couple's joint earned income✓
• b.The nonworking spouse may not contribute, because an IRA contribution requires the owner's own earned income
• c.The nonworking spouse may contribute only to a Roth IRA, and only if the working spouse does not contribute
• d.The nonworking spouse may contribute, but only half of the annual limit, because the income belongs to the other spouse

Under the spousal IRA rule, a nonworking spouse can contribute to an IRA based on the working spouse's earnings when the couple files jointly. Each spouse is subject to the annual limit, and the couple's combined contributions cannot exceed the taxable compensation on the joint return. Own earned income is the test for a single filer, not for a joint filer. The contribution can go to a traditional or a Roth IRA, and both spouses can contribute in the same year. The limit is not halved.Internal Revenue Code Section 219(c): spousal IRA

A customer in the 24% federal bracket compares a taxable bond fund yielding 4.8% with a national municipal bond fund yielding 3.6%. Which gives the higher after-tax yield, and by how much?

• a.The taxable fund, by 1.2 points, the gap between quoted yields
• b.The taxable fund, by 0.05 point at the 24% bracket✓
• c.The municipal fund, by 1.2 points, because it is tax-free
• d.The municipal fund, by 0.05 point, since tax-free income wins

The taxable fund's after-tax yield is 4.8% x (1 - 0.24) = 3.648%, against 3.6% for the municipal fund, a lead of about 0.05 point. Equivalently, the municipal fund's taxable-equivalent yield is 3.6% / 0.76 = 4.74%, just under 4.8%. The 1.2-point gap is the difference before tax, which is the wrong comparison. Tax-free income does not win automatically, because its lower yield must be weighed against the bracket, and at 24% it falls just short.

A closed-end fund has a net asset value of $24.00 per share and trades in the market at $21.60. At what premium or discount to NAV does it trade?

• a.A 90.0% discount, found by dividing the price by the fund's NAV
• b.An 11.1% discount, the $2.40 gap divided by the market price
• c.A 10.0% discount, the $2.40 gap divided by the $24.00 NAV✓
• d.A 10.0% premium, since the shares sell below their asset value

A closed-end fund's premium or discount is measured against NAV: ($21.60 - $24.00) / $24.00 = -10%, so the shares trade at a 10.0% discount. Dividing the $2.40 gap by the $21.60 market price gives 11.1% and uses the wrong base. Calling it a premium reverses the sign, because a market price below NAV is a discount. The 90.0% figure is the price as a percentage of NAV and not the discount itself.

A variable annuity with $100,000 of account value charges 1.25% for mortality and expense risk, 0.15% for administration and a $50 annual contract fee. Its subaccount's expense ratio is 0.80%. What are the total annual costs?

• a.$2,200, which leaves the $50 contract fee out of the total
• b.$2,250, which is 2.20% of the account value plus the $50 contract fee✓
• c.$1,450, which leaves out the subaccount's own expenses
• d.$1,250, which counts the mortality and expense charge alone

The costs stack: 1.25% + 0.15% + 0.80% = 2.20%, and 2.20% x $100,000 = $2,200, plus the $50 contract fee for $2,250. The $2,200 total misses the flat fee. The $1,450 total, 1.40% plus the fee, omits the underlying fund's expenses, which are charged inside the subaccount but still borne by the owner. The $1,250 total counts only the mortality and expense charge.

Class A shares charge a 4.5% front-end load and 0.25% a year in 12b-1 fees. Class C shares have no load and charge 1.00% a year. Ignoring growth, about how long until the Class C shares cost more in total?

• a.About 18 years, dividing the load by Class A's 0.25% fee
• b.About 4.5 years, dividing the load by Class C's full 1.00% fee
• c.About 3.6 years, dividing the load by the combined 1.25% of annual fees
• d.About 6 years, since 4.5% divided by the 0.75% annual gap is 6 years✓

Class A costs 4.5% more on day one but saves 1.00% - 0.25% = 0.75% each year afterward. The extra up-front cost is made up in 4.5 / 0.75 = 6 years, and a holding longer than that favors Class A. Using the full 1.00% ignores that Class A also pays a yearly fee. Dividing by 0.25% looks only at Class A's fee, and adding the two annual fees treats the classes' costs as if they were stacked rather than compared.

A customer redeems all of her Class B shares in year two. She paid $10,000 and the shares are now worth $13,000. The prospectus applies a 4% deferred charge to the lower of original cost or current value. What is the charge?

• a.$120, which is 4% of the $3,000 gain on the shares
• b.$0, because shares that have gained are not subject to the charge
• c.$520, which is 4% of the $13,000 value of the shares
• d.$400, which is 4% of the $10,000 original cost of the shares✓

The prospectus applies the charge to the lower of cost or value, and $10,000 is lower than $13,000, so the charge is 4% x $10,000 = $400. Applying it to the current value would give $520 and ignores the stated base. Charging only the gain gives $120 and misreads the base as profit rather than the lesser amount. A charge of $0 would require a waiver for shares that have gained, but the stated terms apply the charge to the lower base whether or not the shares gained.

A customer buys 1,000 fund shares at $10. During the year she reinvests $500 of distributions at $12.50 a share, and at year end the NAV is $13.00. What is her total return on the original $10,000?

• a.28.8%, which treats the $500 reinvested as new money invested
• b.35.2%, since her 1,040 shares are now worth $13,520✓
• c.30.0%, which counts only the rise in price from $10 to $13
• d.35.0%, which adds the $500 distribution to 1,000 shares at $13

The $500 reinvested at $12.50 buys 40 shares, so she holds 1,040 shares worth 1,040 x $13.00 = $13,520. The gain on her original $10,000 is $3,520, a 35.2% total return. Looking at the price alone gives 30.0% and leaves out the distributions. Adding $500 to 1,000 shares at $13 gives 35.0% and ignores that the reinvested shares also rose from $12.50 to $13. Treating the $500 as a new investment gives 28.8%, though it was her own income and not additional cash.

A fund named the 'Municipal Income Fund' has a non-fundamental policy of investing at least 80% of its assets in municipal bonds. Before it changes that policy, how much notice must it give shareholders?

• a.At least 60 days' prior notice✓
• b.At least 90 days' prior notice
• c.At least 10 days' prior notice
• d.At least 30 days' prior notice

Rule 35d-1 requires a fund that uses a name suggesting a type of investment to adopt an 80% policy, and to give shareholders at least 60 days' prior notice before changing it. The notice must also cover any accompanying change of name.17 CFR 270.35d-1

An interval fund makes a periodic repurchase offer under Rule 23c-3. What range must the repurchase offer amount fall within?

• a.Not less than 5% and not more than 25% of the shares outstanding✓
• b.Not less than 1% and not more than 10% of the shares outstanding
• c.Not less than 25% and not more than 100% of the shares outstanding
• d.Not less than 10% and not more than 50% of the shares outstanding

Rule 23c-3 fixes the repurchase offer amount at no less than 5% and no more than 25% of the shares outstanding on the repurchase request deadline. That limit is what lets an interval fund offer periodic liquidity without being an open-end fund.17 CFR 270.23c-3

What must an ETF relying on Rule 6c-11 publish on its website each business day?

• a.The holdings that will form the basis of its next NAV calculation, posted before the market opens✓
• b.Its holdings as of the last quarter end, posted within 60 days after the quarter closes
• c.Its holdings each month, posted by the fifteenth day of the following month
• d.Its holdings only on request, made available to authorized participants

Rule 6c-11 requires daily disclosure on a free, public website, before regular trading opens, of the portfolio holdings that will form the basis of the next NAV calculation, along with NAV, market price and premium or discount. Lagged quarterly disclosure is how traditional mutual funds report.17 CFR 270.6c-11

A fund has a Rule 12b-1 plan. Which statement about ending the plan is correct?

• a.It may be ended only after 60 days' written notice to the SEC and a two-thirds vote of the full board of directors, including the adviser's representatives
• b.It may be ended only by the principal underwriter, since that firm is the party receiving the 12b-1 payments
• c.It may be ended only at the close of its annual term, and then only by a vote of the adviser's board of directors
• d.It may be terminated at any time, without penalty, by a majority of the independent directors or by a majority of the outstanding voting securities✓

The rule requires a 12b-1 plan to be terminable at any time, without penalty, by a vote of a majority of the directors who are not interested persons, or by a majority of the outstanding voting securities. The distributor has no power to end it.17 CFR 270.12b-1

A closed-end fund wants to borrow money by issuing a senior security representing indebtedness. What asset coverage must it have immediately after the issuance?

• a.At least 300%✓
• b.At least 150%
• c.At least 100%
• d.At least 200%

Section 18 requires asset coverage of at least 300% for a senior security representing indebtedness. The 200% figure applies to a senior security that is stock, such as preferred shares, which is the usual source of confusion.Investment Company Act of 1940 Section 18(a)(1)

Under the Investment Company Act, what is the largest share of a fund's board that may be made up of interested persons?

• a.75%, so at least 25% of the board must be independent
• b.60%, so at least 40% of the board must be independent✓
• c.50%, so at least half of the board must be independent
• d.40%, so at least 60% of the board must be independent

Section 10(a) says no registered investment company may have a board in which more than 60% of the members are interested persons. That leaves a minimum of 40% independent directors, and the 40% figure is often mistaken for the cap.Investment Company Act of 1940 Section 10(a)

A fund's investment advisory contract was approved when the fund began operating. After the first two years, the contract may stay in effect only if its continuance is approved how?

• a.Only when the advisory fee changes, by a majority of the shares voted at a meeting
• b.At least every three years, by a vote of the independent directors alone
• c.At least annually, by the board of directors or by a majority of the outstanding voting securities✓
• d.At least annually, by the SEC after reviewing the adviser's fees

Section 15(a) lets an advisory contract run for two years from its execution. After that it continues only if specifically approved at least annually by the board or by a majority of the outstanding voting securities. The SEC does not approve the contract.Investment Company Act of 1940 Section 15(a)

For a fund to be classified as diversified, what must be true of at least 75% of the value of its total assets?

• a.No more than 5% of total assets is in one issuer and the fund holds no more than 10% of that issuer's voting securities✓
• b.No more than 15% of total assets is in one issuer and the fund holds no more than 10% of that issuer's voting securities
• c.No more than 10% of total assets is in one issuer and the fund holds no more than 5% of that issuer's voting securities
• d.No more than 5% of total assets is in one issuer and the fund holds no more than 25% of that issuer's voting securities

The 75-5-10 test: 75% of assets must be in cash, government securities, other funds and securities limited to 5% of total assets per issuer and no more than 10% of an issuer's voting securities. The other 25% is unrestricted.Investment Company Act of 1940 Section 5(b)(1)

In ordinary conditions, a mutual fund must pay redemption proceeds within what period after the shares are tendered?

• a.Seven days✓
• b.Three business days
• c.Ten days
• d.Fifteen days

Section 22(e) prohibits a redeemable-security issuer from suspending the right of redemption or delaying payment for more than seven days after tender, except in listed emergencies such as an NYSE closing. Many funds pay sooner, but seven days is the legal outer limit.Investment Company Act of 1940 Section 22(e)

A customer's order to buy fund shares reaches the fund's transfer agent at 2:00 p.m. Eastern, before the 4:00 p.m. pricing time. At what price is the order executed under forward pricing?

• a.The NAV computed after the order was received, which will be the one calculated at the close of the day✓
• b.The NAV in effect at 2:00 p.m., because the fund quotes a running price during the day
• c.The NAV computed at the previous close, since the order was placed before the fund priced
• d.The NAV the fund calculates at the next opening, because orders are processed overnight

Rule 22c-1 requires orders to be priced at the NAV next computed after the fund receives them. Open-end funds do not quote an intraday price, and a customer cannot buy at a price already known.17 CFR 270.22c-1

A Rule 482 advertisement quotes a fund's average annual total return. For which periods must the performance be shown?

• a.The most recent twelve months only, since longer periods are optional
• b.One, five and ten years, or the life of the fund if it has been registered for less time✓
• c.Three, five and ten years, or the life of the fund if it has been registered for less time
• d.Year to date and the prior calendar year, with the longer periods shown on request

The rule requires standardized average annual total return for the one-, five- and ten-year periods. If the registration statement has been in effect for a shorter time, that shorter period is substituted.17 CFR 230.482

Under Rule 156, which statement in fund sales literature is most likely to be considered misleading?

• a.A summary of the fund's investment objective as described in its prospectus
• b.A chart of the fund's actual calendar-year returns with the required performance disclosure
• c.A statement implying that the fund's strong three-year gain can be expected to continue✓
• d.A table of the fund's expense ratio taken from the prospectus fee table

Rule 156 treats representations implying that future gains can be inferred from past performance as potentially misleading. Showing actual returns with proper disclosure, the stated objective and the fee table are accurate and consistent with the prospectus.17 CFR 230.156

Which person is an accredited investor on the basis of income, assuming a reasonable expectation of the same income this year?

• a.An individual who earned $190,000 in each of the last two years
• b.A married couple with joint income of $280,000 in each of the last two years
• c.An individual who earned $250,000 two years ago and $150,000 last year
• d.An individual who earned $210,000 in each of the last two years✓

An individual qualifies with income above $200,000 in each of the two most recent years, or joint income above $300,000 with a spouse. $190,000 and $280,000 fall short, and the person with one low year fails the test, which applies to each year.17 CFR 230.501

An issuer wants to advertise a Rule 506 offering to the general public. Which condition applies?

• a.The offering must be limited to residents of the state in which the issuer is based
• b.Up to 35 non-accredited investors may buy if each receives a disclosure document
• c.The issuer must file a full registration statement with the SEC before any advertising
• d.Every purchaser must be an accredited investor, and the issuer must take reasonable steps to verify that status✓

Rule 506(c) permits general solicitation but only if all purchasers are accredited and the issuer takes reasonable steps to verify it. The 35 non-accredited purchasers allowance belongs to 506(b), which bars general solicitation, and the in-state limit belongs to the intrastate exemption.17 CFR 230.506

An investor buys restricted stock directly from an issuer that has been subject to Exchange Act reporting for more than 90 days. What is the minimum holding period before the investor may resell under Rule 144?

• a.Two years
• b.Ninety days
• c.Six months✓
• d.One year

For a reporting issuer, Rule 144 requires six months to pass between the acquisition and resale. The one-year period applies when the issuer is not a reporting company.17 CFR 230.144

What is the Rule 144 volume limit for an affiliate selling over any three-month period?

• a.The greater of 10% of the shares outstanding or the average daily trading volume over the prior thirty days
• b.A flat 5,000 shares, regardless of the issuer's size or trading volume
• c.The lesser of 1% of the shares outstanding or the average weekly trading volume over the prior four calendar weeks
• d.The greater of 1% of the shares outstanding or the average weekly trading volume over the prior four calendar weeks✓

An affiliate may sell, in any three-month period, no more than the greater of 1% of the class outstanding or the average weekly reported volume over the four calendar weeks before the Form 144 is filed. The 5,000 share figure relates to the Form 144 filing threshold.17 CFR 230.144

Under the SEC's standard settlement rule, a broker-dealer may not enter into a contract for most securities transactions that provides for settlement later than when?

• a.The same business day, unless the parties agree otherwise when the trade is made
• b.The second business day after the trade date, unless the parties agree otherwise when the trade is made
• c.The third business day after the trade date, unless the parties agree otherwise when the trade is made
• d.The first business day after the trade date, unless the parties agree otherwise when the trade is made✓

Since May 2024 the standard cycle has been T+1, so settlement later than the first business day after the contract requires an express agreement at the time of the trade. T+2 was the prior cycle.17 CFR 240.15c6-1

With standard settlement at T+1, by when must a customer make full payment for a purchase in a Regulation T cash account, absent an extension?

• a.Within four business days, which is the period that applied under T+2 settlement
• b.Within one business day, since the payment must be made on the settlement date
• c.Within five business days, which is the period used before the settlement cycle was shortened
• d.Within three business days, which is the settlement cycle plus two business days✓

Reg T defines the payment period as the number of business days in the standard settlement cycle plus two business days. With a one-day cycle that is three business days. Four applied when the cycle was T+2.12 CFR 220.2; 17 CFR 240.15c6-1

In one business day a customer deposits $6,000 in currency at a broker-dealer in the morning and another $5,000 in currency in the afternoon. What is the reporting result?

• a.A report is required only if the customer makes a further deposit on the next business day
• b.The transactions are aggregated and a currency transaction report is required, because the total exceeds $10,000✓
• c.No report is required, because each deposit is below $10,000
• d.Only a suspicious activity report is required, because the deposits were separate transactions made at different times of the same day

Multiple currency transactions by or for the same person in one business day are treated as a single transaction when they total more than $10,000. A report is required even though no single deposit crossed the threshold.31 CFR 1010.313; 31 CFR 1023.311

At what minimum amount involved must a broker-dealer file a SAR when it knows or suspects that a transaction involves funds from illegal activity?

• a.There is no dollar threshold for broker-dealers
• b.Transactions involving or aggregating at least $5,000✓
• c.Transactions involving or aggregating at least $3,000
• d.Transactions involving or aggregating more than $10,000

The broker-dealer SAR rule applies to transactions that involve or aggregate funds or assets of at least $5,000. The $10,000 figure is the currency transaction report threshold, which is a different filing.31 CFR 1023.320

A broker-dealer detects facts that may require a SAR but has not identified a suspect. What is the longest it may take to file?

• a.60 calendar days from initial detection✓
• b.15 business days from initial detection
• c.90 calendar days from initial detection
• d.30 calendar days from initial detection

A SAR is due within 30 calendar days of initial detection. If no suspect has been identified then, the broker-dealer may take up to another 30 days, for a maximum of 60.31 CFR 1023.320

Under the amended Regulation S-P, how soon must a firm notify affected individuals after it becomes aware that their sensitive customer information was, or is reasonably likely to have been, accessed without authorization?

• a.Within 10 business days of becoming aware of the incident
• b.Within 72 hours of becoming aware of the incident
• c.At the next annual privacy notice mailing after the incident
• d.As soon as practicable, but not later than 30 days after becoming aware of the incident✓

The amendments require notice to affected individuals as soon as practicable and not later than 30 days after the firm becomes aware, unless the Attorney General finds the notice would create a national security or public safety risk. The 72-hour clock applies to service providers notifying the firm.17 CFR 248.30

Under the amended Regulation S-P, how quickly must a service provider notify the covered institution of a breach in security affecting a customer information system it maintains?

• a.Within 24 hours of becoming aware of the breach
• b.As soon as possible, but no later than 72 hours after becoming aware of the breach✓
• c.As soon as practicable, but no later than 30 days after becoming aware of the breach
• d.At the end of the quarter, along with its regular reporting to the firm

The firm's incident response program must require service providers to notify the firm as soon as possible and not later than 72 hours after becoming aware of a breach. The 30-day period is the deadline for the firm's notice to affected customers.17 CFR 248.30

Who must approve the initial written identity theft prevention program of a covered broker-dealer under Regulation S-ID?

• a.Only the chief compliance officer, without further approval from the board or management
• b.The firm's outside auditor, who must sign off on the red flags identified
• c.The board of directors, an appropriate committee of the board, or a designated senior management employee if there is no board✓
• d.FINRA, which reviews and approves each firm's identity theft program before it takes effect and again each time the program is revised

Regulation S-ID requires the initial written program to be approved by the board, an appropriate committee of the board, or, for a firm with no board, a designated senior management employee. Regulators do not pre-approve the program.17 CFR 248.201

For how long must a broker-dealer preserve account cards and records that relate to the terms and conditions of a customer's account?

• a.At least six years after the customer's account is closed✓
• b.For the life of the firm
• c.At least six years after the account was opened
• d.At least three years after the customer's account is closed

Rule 17a-4(c) requires account cards and records on the terms of the account to be kept at least six years after the account is closed. The clock runs from closing, not from opening.17 CFR 240.17a-4

Regulation Best Interest requires a broker-dealer to satisfy its general obligation by complying with which four component obligations?

• a.Disclosure, care, suitability and supervision
• b.Disclosure, diligence, conflict of interest and reporting
• c.Disclosure, care, conflict of interest and compliance✓
• d.Care, loyalty, candor and supervision

The general obligation is met by the disclosure obligation, the care obligation, the conflict of interest obligation and the compliance obligation. Suitability is a FINRA concept and fiduciary labels such as loyalty and candor are not the Reg BI components.17 CFR 240.15l-1

Under ERISA, a plan fiduciary must discharge duties in what manner?

• a.With the objective of maximizing short-term returns, because the plan must pay out benefits quickly
• b.Solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and paying reasonable plan expenses✓
• c.In the interest of the plan sponsor first, as long as participants receive the benefits promised
• d.In the interest of participants and the plan sponsor equally, so that the sponsor's required contributions to the plan are kept as low as possible

ERISA's fiduciary standard requires acting solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable expenses, with the care of a prudent person. A fiduciary may not favor the sponsor.Employee Retirement Income Security Act of 1974 Section 404(a)(1)

How are securities issued by states and their political subdivisions treated under the Securities Act of 1933?

• a.They are exempt from registration and from the antifraud provisions
• b.They are exempt from registration, but the antifraud provisions still apply✓
• c.They are exempt from registration only if the issuer is located in the state of the buyer
• d.They must be registered with the SEC unless sold only to institutions

Municipal securities are exempt securities under Section 3(a)(2), so no registration statement is required. They remain subject to antifraud rules such as Rule 10b-5.Securities Act of 1933 Section 3(a)(2)

Under the Investment Company Act, what is a vote of a majority of the outstanding voting securities?

• a.At least 67% of all shares outstanding, regardless of how many attend
• b.A simple majority of the shares voted at the meeting, whatever the turnout
• c.67% or more of the shares present if more than 50% are present, or more than 50% of the shares outstanding, whichever is less✓
• d.More than 50% of the shares present at a meeting where holders of one-third of the outstanding shares form a quorum for the vote

The statutory definition takes whichever is less: 67% of shares present when more than half are present, or more than 50% of shares outstanding. It sets a higher bar than a simple majority of the votes cast.Investment Company Act of 1940 Section 2(a)(42)

To qualify as a REIT, an entity must distribute at least what percentage of its REIT taxable income to shareholders each year?

• a.90%, computed without the dividends-paid deduction and excluding net capital gain✓
• b.95%, computed without the dividends-paid deduction and excluding net capital gain
• c.80%, computed without the dividends-paid deduction and excluding net capital gain
• d.75%, computed without the dividends-paid deduction and excluding net capital gain

Section 857 requires a REIT to distribute at least 90% of its REIT taxable income. The 75% figure is the asset and income test for real estate holdings and 95% was the pre-2001 distribution requirement, so both are common mix-ups.Internal Revenue Code Section 857(a)

What day-count convention is used to compute accrued interest on a municipal bond?

• a.Actual days in the month and a 365-day year
• b.Thirty-day months and a 360-day year✓
• c.Actual days in the month and the actual days in the year
• d.Thirty-day months and a 365-day year

MSRB Rule G-33 calculates municipal accrued interest on a 30/360 basis. Actual-day counts are used for U.S. Treasury notes and bonds, and that is the usual source of confusion.MSRB Rule G-33

Which description fits a unit investment trust?

• a.It has a board of directors and issues redeemable securities representing shares in a portfolio that is managed daily
• b.It has no board of directors and issues non-redeemable shares that trade only in the secondary market
• c.It has a board of directors and sells a fixed number of shares that are not redeemable
• d.It has no board of directors and issues only redeemable securities, each an undivided interest in a unit of specified securities✓

The statute defines a UIT as organized under a trust indenture or similar instrument, with no board of directors, issuing only redeemable securities that each represent an undivided interest in a unit of specified securities. That is why the portfolio is fixed rather than managed.Investment Company Act of 1940 Section 4(2)

What must a government money market fund invest in?

• a.At least 95% of its total assets in U.S. Treasury securities, with no repurchase agreements allowed
• b.At least 80% of its total assets in Treasury bills, with the rest allowed in commercial paper
• c.At least 99.5% of its total assets in municipal securities that are exempt from federal tax
• d.At least 99.5% of its total assets in cash, government securities and fully collateralized repurchase agreements✓

Rule 2a-7 defines a government money market fund as one that invests 99.5% or more of its total assets in cash, government securities and fully collateralized repos. Commercial paper and municipal holdings are not part of that definition.17 CFR 270.2a-7

A fund describes itself as a retail money market fund under Rule 2a-7. What limits who may invest in it?

• a.It has a minimum investment of $25,000 so that institutions are discouraged
• b.It limits investors to accredited investors who hold no other money market fund
• c.It has policies and procedures reasonably designed to limit all beneficial owners to natural persons✓
• d.It limits sales to investors who live in the state where the fund is organized

A retail money market fund is one with policies and procedures designed to limit all beneficial owners to natural persons. A minimum investment may discourage institutions but is not the test.17 CFR 270.2a-7

A bond is trading at a premium and is callable at par. How does its yield to call compare with its yield to maturity?

• a.Yield to call cannot be compared, because the bond may never be called
• b.Yield to call is lower, because the premium is lost over a shorter period✓
• c.Yield to call is higher, because the principal is returned sooner
• d.The two yields are equal, because the coupon rate is the same in either case

A premium paid above par is written off over the time to the call date, so a bond that is called sooner loses that premium sooner and earns a lower yield. That is why investors use the lower yield as the conservative measure on premium callable bonds.

A discount bond with a 4% coupon is trading at 92. Compared with the coupon rate, what is true of its current yield and its yield to maturity?

• a.Current yield equals the coupon rate, and yield to maturity is below the coupon rate
• b.Current yield is above the coupon rate, and yield to maturity is below the current yield
• c.Current yield is below the coupon rate, and yield to maturity is below the current yield
• d.Current yield is above the coupon rate, and yield to maturity is above the current yield✓

Current yield is $40 divided by $920, about 4.35%, which is above the 4% coupon. Yield to maturity is higher still because the bond also earns the gain from 92 up to par at maturity.