FINRA Series 6 — All Questions

Withdrawals of earnings from a non-qualified annuity before annuitization are taxed:

• a.As long-term capital gains at the favorable rate that applies to securities held over a year
• b.Only when the contract is fully surrendered and never on a partial withdrawal of earnings
• c.First-in, first-out, so principal is returned before any earnings
• d.As ordinary income on a last-in, first-out basis, so earnings come out first✓

Non-qualified annuities use LIFO ordering, meaning the taxable earnings are deemed withdrawn before the after-tax principal, and they are taxed at ordinary rates. Annuity gains never receive capital gains treatment because the growth was tax deferred, not invested in a taxable capital asset. Partial withdrawals are taxable when taken, not only at full surrender.IRC Section 72(e)

A variable annuity purchased inside a Traditional IRA with fully deductible contributions is distributed at age 65. The distribution is:

• a.Taxable only on the earnings portion
• b.Entirely tax free because annuities are tax favored when held to at least age 65 inside a retirement account
• c.Fully taxable as ordinary income, because there is no after-tax cost basis✓
• d.Taxed at long-term capital gains rates on the growth above the original contributions

When every dollar went in pre-tax, the contract has no basis, so the entire distribution is ordinary income. An exclusion ratio applies only to non-qualified contracts funded with after-tax money. The tax-deferred wrapper never converts ordinary income into capital gains.Internal Revenue Code

An investor dies owning fund shares purchased for $20,000 that are worth $50,000 on the date of death. The heir's cost basis is generally:

• a.$35,000, the average of cost and market value, as the tax rules require for property received from a decedent
• b.Zero, because inherited property has no basis
• c.$20,000, the decedent's original cost
• d.$50,000, the fair market value at the date of death✓

Inherited property generally receives a stepped-up basis equal to its date-of-death fair market value, wiping out the unrealized appreciation for income tax purposes. Carrying over the decedent's cost or using an average has no basis in the tax rules. Gifted property during life, by contrast, generally carries over the donor's basis.Internal Revenue Code

A donor wants to make a large lump-sum contribution to a 529 plan without using lifetime gift tax exemption. Which feature helps?

• a.Contributions are deductible on the federal return up to the annual gift exclusion
• b.529 contributions are never treated as gifts
• c.A special election allows the contribution to be spread over five years for annual gift tax exclusion purposes✓
• d.An election lets the donor spread the contribution over ten years for annual exclusion purposes

Section 529(c)(2)(B) lets a donor elect to treat a contribution above the annual exclusion as made ratably over five years, so five years of annual exclusions apply at once and lifetime exemption is not used up. The period is five years, not ten. Contributions are completed gifts, so saying they are never gifts is wrong, and there is no federal income tax deduction for 529 contributions, although many states offer one.IRC Section 529(c)(2)(B)

A retiree holds only long-term certificates of deposit and a money market fund. The greatest risk to this portfolio over a 25-year retirement is:

• a.Credit risk on federally insured deposits held at the federally insured issuing bank
• b.Currency risk from foreign exchange movements affecting the domestic certificates of deposit
• c.Prepayment risk on the money market fund as its holdings are refinanced early
• d.Purchasing power risk, because returns may not keep pace with inflation✓

Very low-volatility instruments protect principal but historically deliver little real return, so inflation erodes the portfolio's buying power over a long retirement. Insured deposits carry minimal credit risk, and a domestic portfolio has no meaningful currency exposure. Prepayment risk applies to mortgage-backed securities rather than to money market funds generally.

Which type of risk cannot be reduced by holding a widely diversified equity mutual fund?

• a.Systematic risk, also called market risk✓
• b.Business risk of an individual company, which persists no matter how many holdings the fund adds to the portfolio
• c.Single-issuer default risk
• d.Industry concentration risk, a risk that broad diversification is powerless to remove

Diversification eliminates risks specific to a company or industry, but a broad market decline affects nearly all equities at once, so systematic risk remains. That is precisely why diversified funds still lose value in bear markets. The other three are unsystematic risks that spreading holdings across issuers and sectors addresses.

The dominant risk in a high-yield corporate bond fund compared with a Treasury fund is:

• a.Currency risk, arising from foreign-exchange swings on the fund's overseas bond holdings
• b.Legislative risk, the chance that new tax laws erase the interest advantage of the bonds
• c.Credit risk, the possibility that issuers default or are downgraded✓
• d.Reinvestment risk, the risk that maturing coupons must be reinvested at lower prevailing rates

High-yield issuers have weaker balance sheets, so default and downgrade risk drives their price behavior and explains the higher yield. Treasuries carry essentially no credit risk. Reinvestment, legislative, and currency risks exist in various portfolios but do not distinguish high-yield from Treasury funds.

Interest rates rise sharply. Which fund would most likely experience the largest price decline?

• a.A money market fund holding only overnight government paper that reprices almost constantly
• b.A floating rate bank loan fund whose coupons reset upward as rates climb, cushioning its price
• c.A short-term bond fund with a two-year average maturity, whose modest two-year duration limits its sensitivity to rate moves
• d.A long-term government bond fund with a 20-year average maturity✓

Interest rate risk grows with maturity and duration, so the longest-maturity portfolio suffers the largest price drop when yields rise. Money market and short-term bond funds reprice quickly and move very little. Floating rate instruments adjust their coupons upward, which cushions their prices.

A customer will need a down payment for a home purchase in 14 months. The appropriate primary investment objective is:

• a.Tax-advantaged long-term growth, pursued through a tax-deferred retirement account
• b.Preservation of capital and liquidity✓
• c.Aggressive capital appreciation sought through a portfolio of aggressive growth stocks
• d.Speculation using sector funds

A known expense within roughly a year rules out volatility, because a decline just before the purchase cannot be recovered in time. Growth and speculation both accept short-term losses in exchange for long-run returns the customer will never realize. Time horizon is the controlling suitability factor here.

A customer in a high federal tax bracket wants current income in a taxable account and is comfortable with moderate interest rate risk. Which recommendation best fits?

• a.A municipal bond fund, whose income is generally exempt from federal income tax✓
• b.A money market fund
• c.A growth fund that pays no dividends
• d.A high-yield corporate bond fund inside an IRA

Tax-exempt interest is worth the most to investors in high brackets, so a municipal bond fund can deliver a better after-tax yield than a comparable taxable fund. A growth fund does not provide current income, and a money market fund provides income but with minimal yield and no tax advantage. Placing a taxable high-yield fund in an IRA does not address a customer who wants income in a taxable account now.Internal Revenue Code

The combination privilege offered by many fund families allows an investor to:

• a.Exchange one fund for another in the family without recognizing a taxable gain event at the fund's net asset value
• b.Add together simultaneous purchases of two or more funds in the same family to reach a breakpoint✓
• c.Combine purchases made in unrelated fund families to reach a breakpoint threshold across separate and unrelated fund sponsors
• d.Redeem shares at net asset value without any deferred sales charge

The combination privilege lets an investor aggregate concurrent investments across different funds in the same family so the total qualifies for a quantity discount. The trap is confusing it with the exchange (conversion) privilege, which moves money between funds at NAV but is a taxable event. Purchases in unrelated families never combine, and redemption charges are a separate matter.FINRA Rule 2341 (Investment Company Securities)

An investor uses a fund family's exchange (conversion) privilege to move from a growth fund into a bond fund at net asset value. The correct statement is:

• a.No new sales charge applies, but the exchange is a taxable sale of the growth fund and purchase of the bond fund✓
• b.The exchange is completely tax free because it stays within the family of funds offered under a single sponsor's umbrella arrangement
• c.A full front-end sales charge must be paid on the bond fund
• d.The exchange is tax free only if completed within 30 days

The exchange privilege waives an additional sales charge but does not change the tax law: the investor has disposed of one security and acquired another, so gain or loss is recognized. The common misconception is that staying inside the family makes it tax free. Representatives should warn customers of the tax consequence before an exchange.Internal Revenue Code

Dollar cost averaging involves investing a fixed dollar amount at regular intervals. Its principal effect is that:

• a.It guarantees the investor a profit over time
• b.More shares are bought when prices are low and fewer when prices are high, producing an average cost per share below the average price paid✓
• c.It eliminates market risk entirely
• d.The investor buys the same number of shares each period

Because a fixed dollar amount buys more shares at low prices and fewer at high prices, the mathematical result is an average cost per share lower than the simple average of the prices paid. Dollar cost averaging does not guarantee a profit or remove market risk; a sustained decline still produces a loss. A fixed dollar amount, not a fixed share count, is the defining feature.

A fund's sales charge schedule is: under $25,000 = 5.0%; $25,000 to $49,999 = 4.25%; $50,000 to $99,999 = 3.5%. A customer invests $40,000. What sales charge applies?

• a.5.0%, or $2,000
• b.4.25%, or $1,700✓
• c.3.5%, or $1,400
• d.No sales charge, because $40,000 exceeds the first breakpoint

A $40,000 purchase falls in the $25,000 to $49,999 tier, so the rate is 4.25%: $40,000 x 0.0425 = $1,700. Applying the first-tier 5% ($2,000) ignores that the breakpoint at $25,000 already reduced the rate, and using 3.5% would require reaching $50,000. Crossing a breakpoint lowers the charge but never eliminates it.FINRA Rule 2341 (Investment Company Securities)

A customer already owns fund shares now worth $46,000 and invests an additional $9,000. The fund's first breakpoint is at $50,000. Under rights of accumulation, the new purchase:

• a.Receives no breakpoint because the $9,000 purchase alone is below $50,000 in total new contribution value
• b.Qualifies only if the customer signs a letter of intent
• c.Qualifies for the reduced sales charge, because current holdings plus the new purchase exceed $50,000✓
• d.Reduces the sales charge only on the amount above the breakpoint

Rights of accumulation add the current value of existing holdings ($46,000) to the new purchase ($9,000) for a combined $55,000, which clears the $50,000 breakpoint, so the reduced charge applies to the new money. It is a mistake to look only at the new purchase in isolation. A letter of intent is a separate, forward-looking way to reach a breakpoint and is not required here.FINRA Rule 2341 (Investment Company Securities)

A customer invests $12,000 in a fund whose public offering price is $30.00 per share. Ignoring fractional-share rounding, how many shares are purchased?

• a.360 shares
• b.400 shares✓
• c.40 shares
• d.1,200 shares

Shares acquired equal the dollars invested divided by the public offering price, because the investor pays the POP (NAV plus sales charge): $12,000 / $30.00 = 400 shares. Dividing by ten or multiplying instead of dividing produces the other figures. The sales charge is already embedded in the POP, so no separate adjustment is needed.

Which statement best describes an exchange-traded fund (ETF)?

• a.It is a registered fund whose shares trade throughout the day on an exchange at market-determined prices, usually near NAV✓
• b.It is redeemed directly with the fund at NAV by any retail investor, like an open-end fund
• c.It guarantees investors the exact return of the underlying index
• d.It is prohibited from being purchased by retail investors

An ETF trades intraday on an exchange like a stock, and an arbitrage mechanism keeps its price close to net asset value. Unlike an open-end fund, a retail investor buys and sells ETF shares in the secondary market rather than redeeming with the fund; only authorized participants redeem in large creation units. ETFs track but do not guarantee an index and are freely available to retail investors.Investment Company Act of 1940

Which statement about a money market mutual fund is generally correct?

• a.It guarantees a return of principal because its shares are insured by the FDIC
• b.Its shares trade on an exchange at a premium or discount to NAV
• c.It seeks to maintain a stable net asset value, typically $1.00 per share, and is usually sold with no sales charge✓
• d.It invests mainly in long-term corporate bonds, accepting price swings in return for higher yield

A money market fund invests in short-term, high-quality instruments and aims to hold a stable $1.00 NAV, and most are no-load. The classic trap is thinking money funds are FDIC insured; they are securities and can, in rare cases, lose value. They are open-end funds redeemed at NAV, not exchange-traded, and they hold short-term, not long-term, paper.

An investor whose primary objective is current income with relative stability of principal would be best matched with:

• a.An aggressive growth fund
• b.A bond (fixed-income) fund✓
• c.A sector fund concentrated in a single industry
• d.A fund that reinvests all earnings and pays no distributions

A bond fund is built to generate a steady stream of interest income with lower principal volatility than equities, matching an income objective. Growth and sector funds pursue capital appreciation and carry more price risk, and a fund that pays no distributions provides no current income at all. Objective must drive the fund selection.

A key characteristic of an index fund is that it:

• a.Attempts to outperform its benchmark through active stock selection through the portfolio manager's continual active stock selection and market timing
• b.Charges the highest management fees among fund types
• c.Is always structured as a closed-end fund
• d.Seeks to replicate the performance of a market index and typically has low expenses and low portfolio turnover✓

An index fund passively mirrors a benchmark, which keeps trading, research, and management costs low. Active outperformance and high fees describe actively managed funds, the opposite approach. Index funds are commonly open-end funds or ETFs, not necessarily closed-end funds.

The mortality and expense risk (M&E) charge in a variable annuity compensates the insurer for:

• a.Guaranteeing the death benefit and the annuity payout rate, and bearing the risk that expenses exceed the contract's guaranteed maximum✓
• b.The commission paid to the selling representative only
• c.The securities transaction costs inside the subaccounts
• d.The state premium tax on the contract

The M&E charge covers the insurer's mortality guarantees, such as the death benefit and the promise to pay for life at the guaranteed rate, plus the risk that its expenses run higher than the contract's ceiling. It is not simply the sales commission, nor the subaccounts' internal trading costs, nor state premium tax, which are separate items. M&E is a recurring asset-based charge disclosed in the prospectus.

During the accumulation phase of a typical variable annuity, the standard death benefit pays the beneficiary:

• a.The total of all future annuity payments the owner would have received under the contract's settlement option
• b.The greater of the current account value or total purchase payments made, less any withdrawals✓
• c.A fixed amount set by the state insurance department
• d.Nothing, because death benefits apply only after annuitization

The common variable annuity death benefit guarantees the beneficiary at least the money paid in (net of withdrawals) even if the separate account has fallen, or the account value if it is higher. It is not a projection of future payments, nor a state-set figure, and the benefit applies during the accumulation phase. Enhanced death benefit riders can raise this floor for an added fee.

A guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity:

• a.Guarantees that the separate account itself will never lose value
• b.Allows the owner to withdraw a specified minimum amount each year regardless of separate account performance, usually for an additional fee✓
• c.Eliminates all surrender charges on the contract
• d.Automatically converts the variable annuity into a fixed annuity

A GMWB guarantees a stream of withdrawals up to a stated amount even if poor performance would otherwise deplete the account, and the insurer charges an extra fee for the guarantee. It protects the withdrawal stream, not the account value itself, so the subaccounts can still decline. It neither waives surrender charges nor changes the contract into a fixed annuity.

A representative recommends that a customer surrender an existing variable annuity to buy a new 'bonus' annuity that credits an extra 4% to the initial premium. The primary suitability concern is that:

• a.FINRA bars recommending a deferred variable annuity exchange within 36 months of a prior exchange, so the recommendation is automatically a violation
• b.The bonus is taxed as ordinary income in the year it is credited, and the surrender also triggers the 10% early-withdrawal penalty on all gains
• c.The new contract may carry higher ongoing fees and a fresh, longer surrender period that outweigh the bonus, while the surrender may trigger charges on the old contract✓
• d.A Section 1035 exchange cannot be used between two variable annuities, so surrendering the old contract makes all of its gains taxable at once

Bonus annuities typically recover the credited bonus through higher M&E fees and a new multi-year surrender schedule, so the headline bonus can cost the customer more than it delivers, and surrendering the old contract may impose its own charges. Rule 2330 requires a reasonable basis that the customer benefits and consideration of surrender charges and recent exchanges; it does not ban exchanges within 36 months. The bonus is not taxed when credited, and the transaction can qualify as a tax-free 1035 exchange. This is a classic unsuitable-switch red flag.FINRA Rule 2330

The value of one accumulation unit in a variable annuity separate account is determined by:

• a.Dividing the net asset value of the separate account by the number of accumulation units outstanding✓
• b.The assumed interest rate stated in the contract
• c.The performance of the insurer's general account
• d.Premiums paid to date divided by the units issued, so the value changes only when the owner adds new premium

An accumulation unit works like a mutual fund share: its value is the separate account's net assets divided by the units outstanding, so it moves with subaccount performance. The assumed interest rate is used only in the payout phase to price annuity units, not accumulation units. The general account backs fixed guarantees, and the unit value is not tied to premiums paid.Investment Company Act of 1940

An owner of a non-qualified variable annuity dies and leaves the contract to a beneficiary. Compared with inheriting appreciated mutual fund shares, the annuity:

• a.Also receives a full step-up in basis to date-of-death value, precisely as inherited appreciated mutual fund shares receive
• b.Passes entirely income-tax free to the beneficiary
• c.Is taxed to the beneficiary at long-term capital gains rates on the appreciation above the owner's original cost basis
• d.Does not receive a stepped-up basis; the gain above cost basis is taxed to the beneficiary as ordinary income✓

Annuity gains are tax-deferred ordinary income and do not qualify for a step-up at death, so the beneficiary pays ordinary income tax on the amount exceeding the owner's cost basis. Inherited appreciated stock or fund shares, by contrast, generally get a basis step-up that erases the gain. The annuity wrapper never converts that gain into capital gains treatment.Internal Revenue Code

A distinctive feature of variable life insurance compared with a variable annuity is that variable life:

• a.Provides no death benefit, paying only the accumulated cash value to the estate at death
• b.Allows the policyowner to borrow against the policy's cash value through a policy loan✓
• c.Is not considered a security and therefore requires no prospectus or securities registration
• d.Guarantees that the cash value will grow each year regardless of the separate account's investment performance

Variable life builds a cash value the owner can access through policy loans, a feature annuities do not offer in the same way. Variable life provides a guaranteed minimum death benefit and, like variable annuities, is a security requiring securities registration to sell. Its cash value rides on separate account performance and is not guaranteed to grow.

Compared with a scheduled (fixed) premium variable life policy, a variable universal life (VUL) policy generally offers:

• a.Flexible premium payments and an adjustable death benefit within policy limits✓
• b.A minimum guaranteed cash value, as in whole life, regardless of separate account performance
• c.No exposure to investment risk, because premiums are swept into the general account
• d.Fixed, level premiums for life, while a scheduled-premium variable life policy lets the owner skip payments

VUL combines the investment flexibility of variable life with the premium and death-benefit flexibility of universal life, letting the owner vary payments and adjust coverage within limits. Its cash value is still tied to the separate account and is not guaranteed. A scheduled premium policy is the one that requires fixed, level premiums, so the premium flexibility runs the opposite way.

An open-end investment company share is called a redeemable security because:

• a.It can be resold to other investors on a stock exchange
• b.The issuing fund stands ready to buy the share back from the investor at its next computed net asset value✓
• c.It may be redeemed only at a fixed price stated in the prospectus
• d.The investor may return it for a full refund of the sales charge at any time at any time following the original date of purchase

A redeemable security is one the issuer will repurchase; an open-end fund continuously redeems its shares at the next-computed NAV under forward pricing. Selling to other investors on an exchange describes closed-end funds and ETFs. The redemption price is NAV, which floats, not a fixed figure, and the sales charge is not refunded on redemption.Investment Company Act of 1940

Under the Investment Company Act of 1940, a fund's investment advisory contract must be:

• a.Approved once and then continue automatically for the life of the fund
• b.Approved only by the fund's investment adviser
• c.Approved initially by shareholders and the board, then renewed at least annually by the board, including a majority of the independent (non-interested) directors✓
• d.Filed with and approved by the Federal Reserve

The Act ties the adviser's compensation to periodic review: the contract needs initial shareholder and board approval and then annual renewal by the board, specifically a majority of the non-interested directors. It does not renew automatically, cannot be approved by the adviser alone, and is not subject to Federal Reserve approval. This annual review protects shareholders from excessive fees.Investment Company Act of 1940

The Investment Company Act of 1940 generally prohibits an affiliated person of a fund, such as its investment adviser, from:

• a.Selling securities to, or buying securities from, the fund for the affiliate's own account✓
• b.Voting the fund shares the affiliate personally owns at the annual shareholder meeting alongside other investors
• c.Receiving any advisory fee
• d.Attending the fund's board meetings even when the adviser holds an interested-person seat on the board

To prevent self-dealing, the Act bars affiliated persons from principal transactions with the fund, such as selling securities to it or buying securities from it for their own account. Affiliates may still vote shares they own, attend board meetings, and receive contractually approved advisory fees. The prohibition targets conflicts that could harm shareholders, not ordinary governance.Investment Company Act of 1940

A mutual fund's 12b-1 distribution plan must be:

• a.Approved by the SEC each year before it may be used
• b.Approved initially and renewed at least annually by the board, including a majority of the non-interested directors, and may be terminated by those directors or by a vote of the outstanding shares✓
• c.Guaranteed to increase the fund's performance
• d.Unlimited in the amount it may charge shareholders

A 12b-1 plan is a governance matter: it needs board approval, annual renewal by a board that includes a majority of independent directors, and it can be ended by those directors or by shareholders. The SEC does not annually approve individual plans, no plan can guarantee performance, and FINRA caps 12b-1 charges. Ongoing independent oversight is the safeguard.Investment Company Act of 1940

Under Regulation Best Interest (Reg BI), a broker-dealer making a securities recommendation to a retail customer must satisfy four component obligations. They are:

• a.Suitability, Diversification, Liquidity, and Disclosure
• b.Registration, Reporting, Recordkeeping, and Renewal
• c.Know-Your-Customer, Anti-Money-Laundering, Privacy, and Advertising
• d.Disclosure, Care, Conflict of Interest, and Compliance✓

Reg BI, effective since June 2020, requires firms to act in the retail customer's best interest through four obligations: Disclosure, Care, Conflict of Interest, and Compliance. It raised the standard above the older suitability rule, so listing suitability as one of the four is outdated. The other choices mix in unrelated regulatory concepts.Regulation Best Interest

Form CRS (the Customer or Client Relationship Summary) must be:

• a.Filed with FINRA within ten days after each recommendation instead of being given to the customer
• b.Delivered to retail investors and summarize the firm's services, fees, conflicts of interest, standard of conduct, and disciplinary history✓
• c.Signed by the customer and a principal before the first trade in a new account, then updated every year
• d.Prepared only for institutional clients and delivered once a year with the account statement

Form CRS is a short relationship summary that describes the firm's services, fees, conflicts, legal standard of conduct and disciplinary history. Under Rule 17a-14 it is filed once with the SEC through Web CRD and amended as needed, and it must be delivered to each retail investor before or at the earliest of a recommendation, an order, or the opening of an account. It is not a per-recommendation filing, a signed account form, or a document for institutional clients.17 CFR 240.17a-14 (Form CRS)

FINRA's gift rule generally limits gifts given to another person in connection with that person's business to a maximum of:

• a.$300 per person per year✓
• b.$500 per person per year
• c.$1,000 per person per year
• d.No limit, as long as the gift is disclosed

Effective March 30, 2026, FINRA raised the Rule 3220 gift limit from its long-standing $100 to $300 per recipient per year for gifts tied to the business of the recipient's employer; the increase reflects inflation since the rule's 1992 adoption. The former $100 amount applied before 2026. Ordinary business entertainment and certain personal gifts are treated separately, and disclosure does not raise the ceiling.FINRA Rule 3220 (Gifts and Gratuities)

A registered representative wants to sell a private investment away from the firm and be compensated for it. Before participating, the representative must:

• a.Keep a record of the transaction in a personal file and report it on the firm's next annual compliance questionnaire
• b.Provide written notice to the employing firm and receive the firm's written approval✓
• c.Obtain the customer's written consent and give written notice to FINRA instead of the firm
• d.Wait until after the deal closes and then tell the firm in writing what the representative was paid

Rule 3280 requires an associated person to give the employing firm prior written notice of a private securities transaction, describing the deal and the role, and for compensated deals to receive the firm's written approval before participating; the firm then supervises it as its own business. A personal file with a later questionnaire answer, customer consent with notice to FINRA instead of the firm, and telling the firm after closing all fail the rule. Unapproved selling away is a serious violation.FINRA Rule 3280(b) and (c)

A registered representative takes a paid weekend job as a real estate agent. Regarding this outside business activity, the representative must:

• a.Do nothing, because it is unrelated to securities, since real estate licensing falls entirely outside FINRA's jurisdiction
• b.Obtain SEC approval before starting, filing a Form U4 amendment with the Commission for its clearance
• c.Provide prior written notice to the employing member firm✓
• d.Resign the securities registration

Any outside business activity for compensation requires prior written notice to the employing firm so it can assess conflicts and supervisory concerns, even when the work has nothing to do with securities. The SEC does not approve individual outside jobs, and the representative need not resign; the firm may impose conditions or object. Silence is the violation.FINRA Rule 3270 (Outside Business Activities)

A representative wants to borrow $5,000 from a customer who is neither a family member nor a financial institution. Under FINRA rules, this loan is:

• a.Generally prohibited unless it fits a narrow permitted category and the firm's written procedures allow and approve it✓
• b.Always permitted if repaid within 30 days
• c.Permitted as long as the interest rate is at market
• d.Permitted with the branch manager's verbal approval

Borrowing from or lending to customers is generally prohibited unless the arrangement falls within limited exceptions, such as certain family or lending-institution relationships, and the firm's written procedures permit it with proper notice and approval. A quick repayment, a market interest rate, or verbal approval does not cure the conflict. The rule protects customers from exploitation.FINRA Rule 3240 (Borrowing From or Lending to Customers)

A summary prospectus for a mutual fund:

• a.May be used only with institutional investors, because retail investors must always receive the full statutory prospectus
• b.Is a short document that can satisfy prospectus delivery if the full statutory prospectus is available online and provided on request✓
• c.Eliminates the statutory prospectus, which the fund no longer has to prepare or post
• d.Must be filed with the MSRB before it can be sent to any investor

Under Securities Act Rule 498 a summary prospectus with the key facts on objectives, fees, risks and performance can satisfy prospectus delivery when the full statutory prospectus is posted online and sent on request. It supplements rather than replaces the statutory prospectus, so the fund must still prepare and post it, and it is used with retail investors, not only institutions. Mutual fund filings go to the SEC, not the MSRB.Securities Act Rule 498 (17 CFR 230.498)

In the money laundering process, the stage at which illicit cash is first introduced into the financial system, for example through cash deposits, is called:

• a.Integration
• b.Placement✓
• c.Layering
• d.Reconciliation

Placement is the entry point, where dirty cash first enters the financial system. Layering then moves the funds through complex transactions to obscure their origin, and integration returns them to the economy looking legitimate. Structuring deposits just under the $10,000 reporting threshold is a placement tactic firms must watch for; 'reconciliation' is not an AML stage.Bank Secrecy Act

The Securities Investor Protection Corporation (SIPC) protects a customer when:

• a.The customer's mutual fund declines in value
• b.The overall market falls into a bear market
• c.A member broker-dealer fails and customer cash and securities are missing, up to $500,000 including a $250,000 limit for cash✓
• d.The customer is defrauded by a private individual outside any brokerage

SIPC steps in when a member broker-dealer becomes insolvent and customer property is missing, covering up to $500,000 per customer with a $250,000 sublimit for cash. It does not insure against market losses; a fund that simply drops in value is not a SIPC event. Fraud unconnected to a failed member firm is outside SIPC's scope.Securities Investor Protection Act

ERISA, which governs private-sector employer retirement plans, requires that such plans:

• a.Invest exclusively in the employer's own stock, concentrating each participant's retirement savings in a single company's securities
• b.Follow fiduciary standards and minimum participation, vesting, and funding rules to protect plan participants✓
• c.Be offered to government and church employees, the two groups ERISA was specifically written to cover
• d.Guarantee participants a fixed rate of return on their account balances each year regardless of plan investment results

ERISA imposes fiduciary duties and sets minimum eligibility, vesting, and funding standards so participants' benefits are protected and prudently managed. Concentrating a plan entirely in employer stock would violate diversification and prudence duties. Government and church plans are generally exempt from ERISA, and defined contribution plans do not guarantee a return.ERISA

An ABLE account allows tax-advantaged saving for:

• a.Qualified disability expenses of a beneficiary who became disabled before a specified age, with interests treated as municipal fund securities like a 529 plan✓
• b.Any adult's general retirement, with no disability requirement
• c.College tuition only, with no other qualified uses
• d.Short-term trading in individual stocks

ABLE accounts let eligible individuals with disabilities save for qualified disability expenses without losing means-tested benefits, and like 529 college plans their interests are municipal fund securities under MSRB oversight. Eligibility requires the disability to have begun before a specified age. They are not general retirement accounts, are not limited to tuition, and are not trading accounts.Internal Revenue Code Section 529A

A SIMPLE IRA is designed for:

• a.Large corporations with thousands of employees
• b.Government agencies exclusively
• c.Individuals who have no earned income
• d.Small employers, generally those with 100 or fewer employees, funded by employee salary reduction plus an employer contribution✓

A SIMPLE IRA serves small businesses, generally with 100 or fewer employees, combining employee salary-deferral contributions with a required employer match or non-elective contribution. Large employers typically use 401(k) plans, government workers use plans like the TSP or 457, and earned income is required to contribute. SIMPLE plans keep administration light for small firms.Internal Revenue Code

A Coverdell Education Savings Account (ESA) differs from a 529 plan in that the Coverdell:

• a.Has no contribution limit
• b.Has a relatively low annual contribution limit and income-based eligibility phaseouts, though earnings used for qualified education expenses are tax free✓
• c.Is a municipal fund security regulated by the MSRB
• d.Allows unlimited contributions regardless of the beneficiary's age

A Coverdell ESA offers tax-free growth for qualified education expenses but caps annual contributions at a low amount and phases out eligibility at higher incomes, unlike a 529 plan's high limits and no income test. The 529 plan, not the Coverdell, is the municipal fund security. Coverdell contributions also generally must stop once the beneficiary reaches a set age.Internal Revenue Code

A recession is commonly identified by:

• a.A decline in real gross domestic product over two consecutive quarters✓
• b.A single month of rising unemployment reported by the Bureau of Labor Statistics
• c.Any increase in interest rates by the Federal Reserve during a single monthly reporting period
• d.A one-day drop in the stock market of several percentage points in the major indexes

The widely used rule of thumb defines a recession as two consecutive quarters of falling real GDP, reflecting a broad, sustained contraction. A single month of higher unemployment, a rate increase, or a one-day market drop is too brief or narrow to signal a recession. Understanding the business cycle helps match investments to economic conditions.

Monetary policy in the United States is conducted by the Federal Reserve primarily through:

• a.Setting federal income tax rates for both individuals and corporations each year
• b.Open market operations, the discount rate, and reserve requirements✓
• c.Approving the federal budget
• d.Deciding the level of government spending on programs, which the Federal Reserve directs each fiscal year

The Federal Reserve manages the money supply and short-term rates using open market operations, the discount rate, and reserve requirements. Tax rates, the federal budget, and spending levels are fiscal policy tools set by Congress and the President, not the Fed. Distinguishing monetary from fiscal policy is a common exam point.

When market interest rates rise, the prices of existing fixed-rate bonds held by a bond fund generally:

• a.Rise, because higher rates increase the bonds' income paid to the current holders of the bonds
• b.Stay the same, because the coupon is fixed for the life of each bond in the portfolio
• c.Fall, because newly issued bonds offer more attractive yields✓
• d.Become exempt from federal income tax once market rates move above the coupon rate

Bond prices move inversely to interest rates: when rates rise, older bonds paying lower fixed coupons become less attractive, so their prices fall until their yields are competitive. The fixed coupon does not protect the market price, and rate changes have nothing to do with tax status. Longer-maturity bonds fall the most when rates rise.

A balanced fund is best described as a fund that:

• a.Invests only in money market instruments to hold its net asset value stable at exactly one dollar per share
• b.Holds a mix of both equity and fixed-income securities to provide a combination of growth and income✓
• c.Invests exclusively in a single industry sector chosen for its long-term growth potential over the market cycle
• d.Guarantees an equal return to every shareholder each year regardless of prevailing market conditions or portfolio holdings

A balanced fund blends stocks and bonds in one portfolio, aiming to deliver growth from equities and income and stability from fixed income. A money market fund and a sector fund pursue very different, narrower objectives. No fund guarantees a return, so the promise of an equal annual return is false.

A variable annuity separate account has net assets of $9,000,000 and 600,000 accumulation units outstanding. The value of one accumulation unit is:

• a.$15.00✓
• b.$6.67
• c.$150.00
• d.$1.50

Accumulation unit value equals the separate account's net assets divided by the units outstanding: $9,000,000 / 600,000 = $15.00. Inverting the division gives $0.067 and misplacing the decimal gives $1.50 or $150.00. The calculation mirrors how a mutual fund computes NAV per share.