FINRA Series 6 — All Questions

For regulatory purposes, an interest in a 529 college savings plan is classified as:

• a.A variable annuity separate account interest
• b.An exempt security subject to no regulation
• c.A municipal fund security, subject to MSRB rules✓
• d.An open-end investment company under the 1940 Act

Because states establish 529 plans, their interests are municipal fund securities governed by MSRB rules; investors receive an official statement rather than a statutory prospectus (Internal Revenue Code Section 529).

Earnings withdrawn from a 529 plan and used entirely for the beneficiary's qualified college tuition are:

• a.Taxed as ordinary income with a 10% penalty
• b.Taxed to the beneficiary at the student's rate
• c.Taxed as a long-term capital gain
• d.Free of federal income tax✓

A 529 plan's earnings grow tax-deferred and come out federally tax-free when used for qualified education expenses (Internal Revenue Code Section 529). Tax plus a 10% penalty on earnings apply only to non-qualified withdrawals.

In a 529 plan, control of the account:

• a.Belongs to the state sponsor
• b.Passes to the beneficiary at the age of majority
• c.Passes to the beneficiary's parents at college enrollment
• d.Stays with the account owner, who may change the beneficiary to another qualified family member✓

Unlike a custodial account, a 529 leaves ownership and control with the person who opened it, including the right to redirect funds to another eligible family member (Section 529). The beneficiary has no ownership right.

What capital structure is an open-end investment company permitted to issue?

• a.Common and preferred stock, provided the board of directors and a majority of shareholders approve the issue
• b.Common stock and long-term bonds, but not preferred stock, as long as asset coverage stays at 300%
• c.Only one class of voting common stock, though it may be offered under different sales-charge arrangements✓
• d.Multiple classes of voting stock, each carrying a different number of votes per share

Section 18(f)(1) of the Investment Company Act of 1940 bars an open-end fund from issuing senior securities such as bonds and preferred stock; its only leverage is bank borrowing with 300% asset coverage. That leaves common stock, which may be offered in classes that differ in sales-charge arrangements. Shareholder or board approval cannot authorize preferred stock, and bonds are not allowed even with 300% coverage. Closed-end funds, by contrast, may issue senior securities within statutory asset-coverage limits.Investment Company Act of 1940 Section 18(f)(1)

The Investment Company Act of 1940 classifies investment companies as:

• a.Growth, income, and balanced funds
• b.Face-amount certificate companies, unit investment trusts, and management companies✓
• c.Mutual funds, ETFs, and separate accounts
• d.Open-end funds, closed-end funds, and hedge funds, the three legal forms the statute expressly defines

The Act names exactly three classes, with management companies further split into open-end and closed-end. Hedge funds rely on exclusions from the Act, and growth, income, and balanced describe objectives, not legal form.

To qualify as a regulated investment company under Subchapter M and avoid fund-level tax on distributed income, a fund must distribute at least:

• a.50% of its net investment income, the same fraction as the diversification asset test
• b.75% of its realized capital gains
• c.90% of its net investment income paid to shareholders✓
• d.90% of its gross income, as the source-of-income test requires

Subchapter M requires a regulated investment company to pay dividends equal to at least 90 percent of its investment company taxable income, usually called net investment income, which makes the fund a conduit taxed only on what it retains (Internal Revenue Code Section 852(a)(1)). The separate 90 percent figure in the Code is a test of where gross income comes from, not an amount to distribute, and the 50 percent figure is part of the asset diversification test. Limiting the base to capital gains misreads the requirement, and falling short subjects all income to corporate tax.Internal Revenue Code Section 852(a)(1)

A fund family's combination privilege allows an investor to:

• a.Exchange funds within the family with no tax consequence
• b.Add together simultaneous purchases of two or more funds in the same family to reach a breakpoint✓
• c.Redeem shares with no charge
• d.Combine purchases across unrelated fund families to reach a breakpoint offered by any participating fund sponsor

The combination privilege aggregates concurrent purchases across different funds in the same family so the total qualifies for a quantity discount (FINRA Rule 2341). It should not be confused with the tax-triggering exchange privilege.

An investor uses a fund family's exchange privilege to move from a growth fund to a bond fund at net asset value. For tax purposes:

• a.It is tax-free only if completed within 30 days
• b.No new sales charge applies, but the exchange is a taxable sale of the growth fund and purchase of the bond fund✓
• c.A full front-end load must be paid on the bond fund
• d.It is tax-free because it stays within the same family, so that no gain or loss is ever recognized on the transaction

The exchange privilege waives an additional sales charge but does not change the tax result: the investor has disposed of one security and acquired another, so gain or loss is recognized (Internal Revenue Code). Representatives should disclose this before the exchange.

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

• a.It can be resold to other investors on an exchange at a market-determined premium or discount to net asset value
• b.The issuing fund stands ready to buy the share back at its next-computed net asset value✓
• c.The sales charge is refunded on redemption
• d.It may be redeemed only at a fixed price stated in the prospectus

A redeemable security is one the issuer repurchases; an open-end fund continuously redeems shares at the next-computed NAV under forward pricing (Investment Company Act of 1940). Exchange resale describes closed-end funds and ETFs.

A prospectus must be delivered to a purchaser of open-end fund shares:

• a.Only if the customer requests it in writing, since delivery is otherwise left to the selling representative
• b.Only for purchases over $10,000
• c.No later than the confirmation of the sale, regardless of dollar amount✓
• d.Within 30 days after settlement

Open-end funds are in continuous primary distribution, so each purchase is a new issue and the buyer must receive the current prospectus by the confirmation (Securities Act of 1933). Delivery does not depend on a request or a dollar threshold.

Detailed disclosure of a fund's officers, brokerage allocation practices, and full financial statements is found in the:

• a.Official statement
• b.Statement of Additional Information, provided free on request✓
• c.Summary prospectus
• d.Annual report only, which the fund mails to shareholders once every three years

The Statement of Additional Information supplements the prospectus with detailed governance, operational, and financial disclosure and must be sent at no charge to anyone who asks (Investment Company Act of 1940).

Which of the following qualifies as a single person eligible to aggregate purchases for a breakpoint?

• a.A parent buying in a UTMA account for one minor child, combined with the parent's own account✓
• b.A group of coworkers pooling funds
• c.Several unrelated partners in a partnership formed to get the discount
• d.An investment club pooling members' money to buy a single fund position together as a group for a shared discount

Breakpoint aggregation covers an individual, a married couple, and their minor children's custodial accounts as one household. Clubs, partnerships, and groups formed mainly to obtain a discount are excluded (FINRA Rule 2341).

When a shareholder elects automatic reinvestment of fund dividends and capital gains, the distributions buy additional shares at:

• a.The public offering price less the breakpoint discount
• b.The public offering price less half the normal load
• c.Net asset value, no sales charge✓
• d.The offering price locked in at the original purchase

Distributions that a shareholder elects to reinvest buy additional shares at net asset value with no sales charge. FINRA Rule 2341(d)(6)(B) bars a member from selling shares of a fund that imposes a front-end or deferred sales charge on shares bought through reinvestment of dividends (for funds registered since April 2000), so the shareholder compounds without a new load. A breakpoint reduction, a half load and a price locked to the original purchase all keep some sales charge in the transaction.FINRA Rule 2341(d)(6)(B)

On the ex-date of a mutual fund's capital gains distribution, the fund's net asset value per share, all else equal:

• a.Doubles
• b.Falls by the amount of the distribution✓
• c.Is unchanged
• d.Rises by the amount of the distribution

A distribution transfers value from the fund to shareholders, so NAV drops by the per-share distribution on the ex-date. This is why selling dividends, urging a purchase just before a distribution, offers no real economic gain.

A fund has total assets of $525,000,000, total liabilities of $25,000,000, and 40,000,000 shares outstanding. Its NAV per share is:

• a.$12.50✓
• b.$20.00
• c.$13.75
• d.$13.13

NAV per share = (total assets - total liabilities) / shares outstanding = ($525,000,000 - $25,000,000) / 40,000,000 = $500,000,000 / 40,000,000 = $12.50 (Investment Company Act of 1940). Ignoring liabilities overstates it at about $13.13.

A customer invests $10,000 at a public offering price of $25.00 per share (the sales charge is already reflected in that price). Ignoring fractions, how many shares are purchased?

• a.400✓
• b.250
• c.375
• d.500

Shares = amount / POP = $10,000 / $25.00 = 400 shares. Because the load is embedded in the $25.00 POP, no separate sales-charge deduction is made.

A fund may impose the maximum 8.5% sales charge only if it offers investors:

• a.A letter of intent, a CDSC, and rights of accumulation
• b.A no-load class and daily liquidity
• c.Breakpoints, rights of accumulation, and reinvestment of distributions at NAV✓
• d.A guaranteed return, breakpoints, and monthly statements that are sent to every shareholder each and every month

FINRA Rule 2341 conditions the 8.5% ceiling on the fund providing breakpoints, rights of accumulation, and reinvestment of distributions at NAV; a fund lacking any of these must charge less. No fund may guarantee a return.

A customer wants to invest $49,000 in a fund whose next breakpoint is at $50,000. The representative processes it without mentioning the breakpoint. This is:

• a.Switching, requiring principal approval
• b.Acceptable, because breakpoints start above $100,000
• c.Acceptable, because the customer named the amount
• d.Breakpoint selling, a prohibited practice✓

Selling just below a breakpoint without disclosing that a slightly larger purchase would cut the sales charge is breakpoint selling, prohibited under FINRA Rule 2341. The customer naming the amount does not excuse the representative's duty to disclose.

Rights of accumulation allow an investor to:

• a.Commit to future purchases within 13 months to keep a discount
• b.Add the current value of existing holdings to a new purchase to reach a breakpoint, with no deadline✓
• c.Count purchases in unrelated fund families toward a breakpoint
• d.Eliminate the sales charge on all future purchases once the first breakpoint is reached, and apply to every later purchase made in the fund family

Rights of accumulation let existing holdings count toward a new purchase's breakpoint, and there is no time limit (FINRA Rule 2341). Committing to future purchases within 13 months describes a letter of intent instead.

A letter of intent for mutual fund breakpoints:

• a.Lets purchases in any fund family count toward the goal
• b.Is a binding contract the investor must complete or forfeit the discount
• c.Covers 24 months and cannot be backdated
• d.Covers 13 months and may be backdated up to 90 days to include a recent purchase✓

An LOI pledges a stated investment within 13 months for a reduced sales charge and may be backdated as much as 90 days to include a recent purchase (FINRA Rule 2341). It is not binding; unmet, the fund liquidates escrowed shares to collect the higher charge.

Which statement about Class B mutual fund shares is accurate?

• a.They pay no ongoing 12b-1 fee, because the sales charge is collected through the deferred charge instead
• b.They carry a front-end load that shrinks with purchase size and have the lowest annual expenses of any class
• c.They carry a level deferred charge for as long as the shares are held and never convert to another class
• d.They carry a contingent deferred sales charge that declines each year and typically convert to Class A after a set period✓

Class B shares are sold without a front-end load but carry a contingent deferred sales charge that steps down over several years, often six, and then ends, after which they usually convert to lower-cost Class A shares. During that time they bear a 12b-1 fee higher than Class A, so the deferred charge does not replace ongoing fees. A front-end load and the lowest annual expenses describe Class A, and a charge that never converts, with higher annual expenses indefinitely, describes Class C.

A fund may call itself no-load only if:

• a.It waives the front-end charge but may still impose a contingent deferred sales charge and unlimited 12b-1 fees
• b.It has no 12b-1 plan of any kind and no contingent deferred sales charge
• c.Its combined annual asset-based sales and service charges do not exceed 0.25% of average net assets✓
• d.It charges no more than a 3% front-end load and keeps 12b-1 fees at 0.25% or less

Rule 2341(d)(4) bars calling a fund no load if it has any front-end or deferred sales charge, or if its combined sales-related and service charges exceed 0.25% of average net assets a year. A plan at or under that level is allowed, so a fund need not have no 12b-1 plan at all, a contingent deferred sales charge or unlimited 12b-1 fees disqualify it, and even a small front-end load disqualifies it.FINRA Rule 2341(d)(4)

Which statement about a typical mutual fund letter of intent (LOI) for breakpoints is correct?

• a.It is a binding contract requiring the investor to complete the purchases on penalty of forfeiting the discount
• b.It covers 13 months and may be backdated up to 90 days to include a prior purchase✓
• c.It permits the investor to count purchases made in any other fund family toward reaching the breakpoint discount
• d.It covers 12 months and cannot be backdated

A typical LOI lets an investor obtain a reduced sales charge by stating an intended total purchase over 13 months, and it may be backdated as much as 90 days so a recent purchase counts toward the goal. The letter is not binding: if the investor does not complete it, the fund redeems escrowed shares to collect the higher sales charge. Only purchases in the same fund family count toward the goal, so shares of unrelated fund companies do not. The usual period is 13 months, not 12, and the backdating feature is what lets an earlier purchase count.FINRA Rule 2341 (Investment Company Securities)

An investor plans to place $15,000 in a fund, expects to need the money in about two to three years, and wants to avoid a front-end sales charge. Which share class is generally most suitable?

• a.Class B shares, because the contingent deferred sales charge typically falls to zero after the first year, well before the money is needed
• b.Class A shares, because the one-time front-end charge is recovered through lower annual fees within the first year or two of the holding period
• c.Class C shares, because there is little or no front-end charge and only a short contingent deferred charge✓
• d.Class B shares, since they convert to lower-cost Class A shares as soon as the first year ends and the deferred charge then lapses

Class C shares carry no front-end charge and usually a small deferred charge, often 1 percent, that applies only to shares sold within about a year, so after two or three years the investor typically pays only the higher annual fee. Class B shares normally keep a declining deferred charge for several years, often six, and convert to Class A only after it ends, so a sale after two or three years would usually still cost something. Class A shares charge the front-end sales charge the investor wants to avoid, and its lower annual fees take longer than a short holding period to make up for it.

Under the Investment Company Act of 1940, an open-end investment company may issue:

• a.Only voting shares, which may be offered in several classes with different sales charge and fee arrangements✓
• b.Common stock and preferred stock, as long as the preferred stock is covered by at least 200 percent of the fund's assets
• c.Common stock and long-term debentures, as long as the debt carries 300 percent asset coverage
• d.Any capital structure the board approves, if the prospectus discloses it to shareholders

Section 18(f)(1) makes it unlawful for a registered open-end company to issue any class of senior security, with one exception: it may borrow from a bank if asset coverage is at least 300 percent. Rule 18f-3 does let it issue more than one class of voting stock, each with its own distribution or shareholder-service arrangement, which is why Class A, B and C shares exist. The 200 percent coverage test for preferred stock and the 300 percent test for public debt are closed-end fund rules and do not let an open-end fund sell preferred stock or bonds. The board cannot approve a structure the statute prohibits, and disclosure in the prospectus does not change that.Investment Company Act of 1940 Section 18(f)(1); Rule 18f-3 (17 CFR 270.18f-3)

Under typical fund prospectus rules for combining purchases to reach a breakpoint, which of the following does NOT qualify as a single "person"?

• a.An investment club whose members pool their money✓
• b.A husband and wife purchasing together in a joint account
• c.A parent buying through a custodial account for the parent's own minor child
• d.A trustee buying for one trust estate or single fiduciary account

Funds typically let an individual, a married couple, their minor children's custodial accounts, and a trustee buying for a single trust or fiduciary account combine purchases, because each is one household or one fiduciary relationship. Investment clubs, associations and other groups formed mainly to obtain a reduced sales charge are not treated as a single person. Allowing a club to aggregate would let unrelated investors buy their way into discounts intended for a single household or account.FINRA Rule 2341 (Investment Company Securities)

A 65-year-old annuitant and a spouse of similar age are comparing settlement options for the same account value. Which option generally produces the smallest monthly payment?

• a.Life with 10-year period certain
• b.Unit refund annuity
• c.Joint and last survivor✓
• d.Straight life (life only)

A joint and last survivor option keeps paying until the second of two lives of similar age ends, which is the longest expected payout period, so each monthly payment is the smallest. Straight life pays the most because it stops at the annuitant's death with no residual guarantee. Life with a 10-year period certain and a unit refund annuity each add a guarantee that lowers the payment somewhat, but they still cover only one life and pay more than a joint option for two lives.

A prospectus (or a summary prospectus that meets Rule 498) must be delivered to a purchaser of open-end fund shares:

• a.Only when the customer asks for it in writing, because delivery is otherwise left to the selling representative's discretion
• b.Only for lump-sum purchases of $10,000 or more, since smaller and periodic purchases are exempt from the delivery requirement
• c.No later than the confirmation of the sale, regardless of dollar amount✓
• d.Within 30 days after settlement, once the investor has had time to review the fund's disclosure

Section 5(b)(2) of the Securities Act of 1933 bars delivering a registered security unless a prospectus accompanies or precedes it, and Section 2(a)(10) treats a confirmation of sale as a prospectus itself unless a compliant prospectus was sent before or with it. Open-end funds are in continuous distribution, so each purchase needs one by the confirmation. Rule 498 lets a summary prospectus meet that timing when the statutory prospectus is available online. Delivery does not depend on a written request, a dollar threshold, or a period after settlement.Securities Act of 1933 Sections 2(a)(10) and 5(b)(2)

Under FINRA Rule 2341, a fund with no asset-based sales charge may impose the maximum 8.5% sales charge only if it offers:

• a.Quantity discounts on single purchases, with rights of accumulation made optional
• b.Rights of accumulation alone, with quantity discounts left to the fund's discretion
• c.Both breakpoints and rights of accumulation on the schedules the rule sets✓
• d.A contingent deferred sales charge and a letter of intent, with no breakpoints required

For a fund with no asset-based sales charge, Rule 2341(d)(1) caps front-end and deferred sales charges at 8.5% of the offering price only when the fund offers both rights of accumulation and quantity discounts (breakpoints) on the required schedules. Without rights of accumulation the cap falls to 8.0%, with rights of accumulation but no quantity discounts it falls to 7.75%, and with neither it is 7.25%. A contingent deferred sales charge and a letter of intent are not substitutes for breakpoints.FINRA Rule 2341(d)(1)

A closed-end fund's shares trade at $12.40 while its net asset value is $11.80. As a percentage of NAV, the shares trade at a premium closest to:

• a.5.1%, found by dividing the $0.60 gap by the $11.80 NAV✓
• b.4.8%, found by dividing the $0.60 gap by the $12.40 price
• c.0.6%, found by restating the $0.60 gap as a percentage
• d.6.0%, found by dividing the $0.60 gap by a $10 par value

Premium = (market price - NAV) / NAV = ($12.40 - $11.80) / $11.80 = about 5.1%. Dividing by the market price gives 4.8% and understates the premium, because NAV is the base. Par value plays no part in the formula, and the $0.60 is a dollar gap, not a percentage.Closed-end fund premiums and discounts

A closed-end fund wants to raise leverage by issuing bonds. Under the Investment Company Act of 1940, it must keep asset coverage of at least:

• a.300% of the debt, so $3 of assets back every $1 of bonds✓
• b.100% of the debt, meaning one asset dollar per dollar of bonds
• c.150% of the debt, meaning $1.50 of assets per $1 borrowed
• d.200% of the debt, so $2 of assets stand behind each bond dollar

Section 18 requires 300% asset coverage for a closed-end fund's senior debt. The 200% test applies to its preferred stock, not to bonds. Neither 150% nor 100% is a coverage ratio the Act sets for senior securities.Investment Company Act of 1940 Section 18(a)(1)

Which statement about borrowing by an open-end mutual fund is correct?

• a.It may sell bonds to the public, if it keeps 300% asset coverage
• b.It may issue preferred stock, if it keeps 200% asset coverage
• c.It may borrow from any lender, if the board approves each loan
• d.It may borrow from banks only, and must keep 300% asset coverage✓

An open-end fund may not issue bonds or preferred stock, which are senior securities reserved to closed-end funds (at 300% and 200% coverage). Its only permitted borrowing is from banks, with 300% asset coverage. Board approval does not widen the list of lenders.Investment Company Act of 1940 Section 18(f)

An interval fund follows a fundamental policy of making periodic repurchase offers. Each offer must be:

• a.10% to 50% of shares outstanding, made every 1, 2, or 3 months
• b.1% to 5% of shares outstanding, made every 12 to 24 months
• c.5% to 25% of shares outstanding, made whenever the board decides
• d.5% to 25% of shares outstanding, made every 3, 6, or 12 months✓

Rule 23c-3 requires each repurchase offer to be between 5% and 25% of outstanding shares, at fixed periodic intervals of 3, 6, or 12 months stated in the prospectus. The other ranges are not in the rule, and an offer at the board's discretion would not be a periodic interval.Rule 23c-3 under the Investment Company Act of 1940

A customer buys 500 shares of an exchange-listed closed-end fund from another investor through a broker-dealer. Who receives the purchase price?

• a.The fund's underwriter, which earns the sales load on every secondary trade
• b.The selling investor, because the fund is not a party to the trade✓
• c.The fund, which retires the shares at NAV and cancels the seller's position
• d.The fund's transfer agent, which forwards the money to the fund each week

After the initial offering, closed-end shares trade between investors at the market price, so the seller gets the proceeds. The fund receives money only in its original offering or in a later offering of new shares. Shares bought on the exchange are not retired, and an underwriter has no role in secondary trades.Closed-end fund secondary market

An open-end fund must pay redemption proceeds within seven days. It may delay payment only if:

• a.the redeeming shareholder bought the shares within the last 12 months
• b.the fund's board votes to suspend redemptions after a weak market quarter
• c.the SEC permits it, such as when the NYSE is closed for other than holidays✓
• d.redemption requests on a single day exceed 5% of the fund's net assets

Section 22(e) limits suspension to narrow cases: the NYSE is closed other than for customary holidays or weekends, trading is restricted, an emergency makes valuation impracticable, or the SEC orders it. Heavy redemptions, a board vote, or a short holding period do not allow a delay.Section 22(e) of the Investment Company Act of 1940

A fund board imposes a redemption fee on shares sold within 30 days of purchase. Under Rule 22c-2, the fee may not exceed:

• a.5% of the amount redeemed, and it is paid into the fund
• b.2% of the amount redeemed, and it is paid to the fund itself✓
• c.2% of the amount redeemed, and it is paid to the underwriter
• d.1% of the amount redeemed, and it is split with the dealer

Rule 22c-2 caps a redemption fee at 2% of the amount redeemed, and the fee goes back into the fund to protect remaining shareholders from short-term trading costs. It is not a sales charge, so the underwriter and selling dealer do not receive it.Rule 22c-2 under the Investment Company Act of 1940

An investor owns 1,000 fund shares. The fund pays a $0.50 per share dividend, and the NAV falls from $20.00 to $19.50 on the ex-date. If the investor reinvests the dividend at NAV, how many shares does the investor receive?

• a.26.32, found by dividing the $500 by a $19.00 NAV
• b.25.00, found by dividing the $500 by the $20.00 old NAV
• c.25.64, found by dividing the $500 by the $19.50 NAV✓
• d.20.51, found by dividing $400 after tax by $19.50

Reinvestment buys shares at the NAV after the distribution: $0.50 x 1,000 = $500, and $500 / $19.50 = 25.64 shares. Using the earlier $20.00 NAV or subtracting the dividend twice gives the wrong price. The fund does not withhold tax from the dividend, so the full $500 is reinvested.Mutual fund distributions

A fund's public offering price is $31.50 and its sales charge is 6% of the offering price. The NAV per share is closest to:

• a.$25.50, found by subtracting $6.00 from the offering price
• b.$29.61, found by multiplying the offering price by 0.94✓
• c.$29.72, found by dividing the offering price by 1.06
• d.$31.44, found by subtracting $0.06 from the offering price

The sales charge is a percentage of the offering price, so NAV = POP x (1 - 0.06) = $31.50 x 0.94 = $29.61. Dividing by 1.06 treats the charge as a markup on NAV, and subtracting 6 cents or $6.00 treats 6 as a dollar amount.Mutual fund pricing

An investor invests $10,000 in a fund with an NAV of $11.40 and a 5% sales charge based on the offering price. How many shares does the investor receive?

• a.791.67, because $9,500 is divided by the $12.00 offering price
• b.833.33, because the offering price is $12.00 ($11.40 / 0.95)✓
• c.835.42, because the offering price is $11.97 ($11.40 x 1.05)
• d.877.19, because $10,000 is divided by the $11.40 NAV

POP = NAV / (1 - sales charge) = $11.40 / 0.95 = $12.00, and $10,000 / $12.00 = 833.33 shares. Dividing by NAV ignores the load, deducting 5% from the dollars and also using the load-included price counts the charge twice, and multiplying NAV by 1.05 treats the load as a markup on NAV.Mutual fund pricing

An investor puts $200 a month into a fund. The share price is $10, $8, then $5 over three months. The investor's average cost per share is closest to:

• a.$7.67, found by averaging the three monthly share prices
• b.$7.06, found by dividing $600 by the 85 shares bought✓
• c.$5.00, found by using the lowest price the investor paid
• d.$8.00, found by taking the middle of the three share prices

The investor bought 20 + 25 + 40 = 85 shares for $600, so the average cost is $600 / 85 = $7.06. That is below the $7.67 average price because more shares were bought when the price was low. Neither the middle price nor the lowest price describes what was paid on average.Dollar cost averaging

In a mutual fund prospectus fee table, which item is shown under annual fund operating expenses rather than shareholder fees?

• a.The redemption fee, which is paid on shares sold within 30 days
• b.The 12b-1 fee, which is taken from fund assets every year✓
• c.The maximum sales charge, which is paid by the investor at purchase
• d.The maximum deferred sales charge, which is paid at redemption

Shareholder fees are charged directly to the investor on a transaction: front-end loads, deferred loads, and redemption fees. Annual fund operating expenses, such as management and 12b-1 fees, are deducted from fund assets and reduce the NAV.Mutual fund prospectus fee table

Which feature keeps an ETF's market price close to its NAV?

• a.Authorized participants can create or redeem share blocks in kind✓
• b.Exchange rules bar any trades more than 1% away from the NAV
• c.The ETF redeems any investor's shares directly at NAV each day
• d.A specialist sets each day's price equal to the closing NAV

Authorized participants can exchange a basket of securities for a creation unit of ETF shares, or the reverse, so any gap between price and NAV can be arbitraged away. Retail investors cannot redeem directly with an ETF, and no rule fixes the price to NAV.Exchange-traded funds

A customer wants to hold a 2x leveraged ETF for six months. Which statement is accurate?

• a.Six-month results can differ sharply from 2x the index, because leverage resets daily✓
• b.Six-month results will equal twice the index return, because the fund targets 2x of the index
• c.Losses are capped at twice the index loss, so a long holding period carries little risk
• d.Daily resets affect inverse ETFs only, not leveraged ETFs that seek 2x or 3x the index

Leveraged and inverse ETFs seek their multiple of the index return for a single day. Over longer periods, compounding can push results far from the stated multiple, especially in volatile markets, so FINRA warns that they are unsuitable for many buy-and-hold investors.Leveraged and inverse ETFs; FINRA Regulatory Notice 09-31

Under Rule 2a-7, a money market fund's dollar-weighted average maturity may not exceed:

• a.90 days, and no single security may have more than 397 days remaining
• b.120 days, and no security may have more than 2 years remaining
• c.60 days, and no single security may have more than 397 days remaining✓
• d.60 days, and no single security may have more than 270 days remaining

Rule 2a-7 caps a money market fund's weighted average maturity at 60 days and the remaining maturity of any security at 397 days. The 120-day figure is the separate weighted average life limit, not the maturity cap.Rule 2a-7 under the Investment Company Act of 1940

Which money market funds must price their shares with a floating NAV?

• a.Government funds, which price shares to four decimal places
• b.All money market funds, because the SEC banned the stable $1.00 NAV
• c.Retail prime funds, which price shares to the nearest cent
• d.Institutional prime funds, which price shares to four decimal places✓

After the SEC's 2014 reforms, institutional prime funds (and institutional tax-exempt funds) float their NAV to four decimal places. Government and retail funds may keep a stable $1.00 NAV, so there was no blanket ban.Rule 2a-7 under the Investment Company Act of 1940

A contractual plan may deduct a sales load of up to what share of total payments over the plan's life, and of any one payment in the first year?

• a.9% over the life of the plan, and 20% of any one first-year payment
• b.9% over the plan's life, and 50% of any one first-year payment✓
• c.8.5% over the life of the plan, and 50% of any one first-year payment
• d.9% over the life of the plan, and 100% of the first payment made

Section 27 caps the total load on a periodic payment plan at 9% of payments, with no more than 50% of any one payment in the first year. The 8.5% figure is the FINRA cap for ordinary fund sales charges, a different rule.Section 27 of the Investment Company Act of 1940

A variable life policyholder has a $20,000 policy loan outstanding when the insured dies. The death benefit paid to the beneficiary is:

• a.unchanged, because gains in the separate account repay the loan
• b.reduced by the unpaid loan and any interest owed on that loan✓
• c.paid in full, with the loan collected from the insured's estate
• d.reduced only if the loan exceeds the policy's cash value to date

A policy loan is deducted from the death benefit if it is unpaid at death, along with accrued interest. The loan is not repaid automatically from investment gains, and the insurer does not pursue the estate separately.Variable life insurance

An annuitant chose a life income option with a 10-year period certain and dies after receiving payments for four years. What happens next?

• a.The payments stop at once, because the annuitant has died
• b.The beneficiary receives the remaining value in one lump sum
• c.The beneficiary receives payments for the six remaining years✓
• d.The beneficiary receives the payments for the next full ten years

A period certain guarantees payments for at least the stated period. Four of ten years are gone, so the beneficiary collects the remaining six. Payments would stop at death only under a straight life option, and the guarantee runs from the start date, not from the death.Annuity payout options

A variable annuity owner moves $30,000 from a stock subaccount to a bond subaccount within the same contract. The tax result is:

• a.tax only if the owner makes more than 12 transfers in the year
• b.ordinary income tax on the gain, plus a 10% penalty if under age 59 1/2
• c.no tax, because transfers among subaccounts are not taxable events✓
• d.capital gains tax on the gain earned in the stock subaccount

Moving money among the subaccounts of a variable annuity is not a sale, so nothing is taxed until money is withdrawn. Gains in a nonqualified annuity are taxed as ordinary income at withdrawal, never as capital gains, and the number of transfers does not trigger tax.Variable annuities

How does a global fund differ from an international fund?

• a.A global fund invests only in developed markets outside the United States
• b.A global fund invests only in emerging markets outside the United States
• c.A global fund may invest in issuers from anywhere, including the United States✓
• d.A global fund invests only in foreign subsidiaries of U.S. companies

A global fund (or world fund) can hold securities from any country, including the U.S. An international fund (or foreign fund) excludes the U.S. Neither type is limited to developed markets, emerging markets, or subsidiaries.Types of funds