FINRA Series 6 — All Questions

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 representative repeatedly redeems a customer's shares in one mutual fund family and reinvests the proceeds in a similar fund at another family, generating a new sales charge each time with no benefit to the customer. This practice is called:

• a.Switching, an improper practice✓
• b.Selling dividends, recommending a fund purchase just before the record date to capture its payout
• c.Breakpoint selling, steering a customer to purchases just below a sales-charge reduction
• d.Front-running, trading ahead of a customer's order to benefit the representative's own account

Moving a customer between funds with substantially similar objectives solely to generate additional sales charges is switching, and without a documented benefit to the customer it is an improper practice. Selling dividends is recommending a purchase shortly before a distribution so the customer pays for income already earned. Breakpoint selling is steering a purchase just under the amount that would reduce the sales charge. Front-running is trading ahead of a known customer order, which is not what happens here.FINRA Rules

A shareholder sells part of a mutual fund holding bought on different dates and does not adequately identify which shares are sold. Setting aside an average-cost election or a custodian's own default method, which cost basis method does the IRS rule apply?

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

When the lot sold is not adequately identified, Treasury Regulation 1.1012-1(c)(1) charges the sale against the earliest lot purchased, which is first in, first out. Average cost is available for fund shares only by election or through the custodian's default method, so it is not the IRS rule for an unidentified sale. Last in, first out is not a permitted method for these shares. Specifically identifying the highest-cost shares works only if the shareholder adequately identifies them at the time of sale.Treas. Reg. 1.1012-1(c)(1)(i); 1.1012-1(e)

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

• a.A municipal bond fund, whose income is generally exempt from federal income tax✓
• b.A Treasury money market fund, whose interest is exempt from federal tax
• c.A high-yield corporate bond fund, whose extra yield outweighs the tax
• d.A growth fund that pays no dividends, deferring any tax on its gains

Tax-exempt interest is worth the most to investors in high brackets, so a high-quality municipal bond fund can deliver a better after-tax yield than a comparable taxable fund, with moderate interest rate risk and limited credit risk. Treasury interest is exempt from state and local tax, not federal tax. A high-yield corporate fund adds credit risk the customer wants to limit and its interest is fully taxable. A growth fund that pays no dividends does not provide the current income the customer wants.Internal Revenue Code Section 852(b)(5)

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)

Before a newly formed open-end fund may make its first public offering of shares, the Investment Company Act of 1940 requires:

• a.A net worth of at least $500,000 and at least 100 shareholders of record
• b.A five-year performance record filed with the SEC
• c.Approval of the fund's organization by a majority of the state securities administrators
• d.A net worth of at least $100,000, or firm commitments from up to 25 buyers that bring it to that level✓

Section 14(a) of the 1940 Act sets a seed-capital rule: the fund must have a net worth of at least $100,000 before its public offering, or the SEC must be satisfied that commitments from no more than 25 responsible persons will bring it to that amount. The statute has no shareholder-count test, a larger $500,000 minimum, or performance-record requirement, and a brand-new fund by definition has no track record. Funds register with the SEC, not with state administrators or a FINRA or NASAA board.Investment Company Act of 1940, Section 14(a) (15 U.S.C. 80a-14(a))

For an individual customer's account that requires a suitability determination, a firm must send the customer a copy of the account record for verification of the investment profile:

• a.Within 30 days of opening the account and again only when the customer asks for an update
• b.Within 30 days of opening the account and at least once every 36 months thereafter✓
• c.Within 60 days of opening the account and at least once every 12 months after that
• d.At account opening and then only when the customer's mailing address or employer changes

SEC Rule 17a-3(a)(17) requires the firm to furnish the account record within 30 days of opening and at intervals no greater than 36 months thereafter, and to send an updated record within 30 days of learning of a change, for accounts in which it makes suitability determinations. A request-only schedule, a 60-day and 12-month schedule, or a single copy at opening do not satisfy the rule.SEC Rule 17a-3(a)(17) (17 CFR 240.17a-3(a)(17))

Before recommending a deferred variable annuity, a representative must have a reasonable basis grounded in:

• a.The commission the product pays relative to comparable annuities, since compensation shapes the recommendation
• b.The insurer's financial strength ratings and the subaccounts' five-year peer rankings published by independent services
• c.The customer's age, financial situation, tax status, objectives, time horizon, liquidity needs, and risk tolerance✓
• d.The customer's annual income and net worth alone, which fix how much to invest and make the other profile factors unnecessary

Before recommending a deferred variable annuity the representative must make reasonable efforts to obtain the customer's investment profile, including age, income, financial situation and needs, investment objectives, time horizon, liquidity needs, risk tolerance and tax status (FINRA Rule 2330(b)(2)), and Regulation Best Interest's Care Obligation also requires matching the recommendation to that profile. Compensation is a conflict of interest to be mitigated, not a basis for recommending a product. Product ratings and rankings may inform the choice but say nothing about whether it fits this customer. Income and net worth are only two of the profile factors, so relying on them alone is not enough.FINRA Rule 2330(b)(2); 17 CFR 240.15l-1(b)(2)

A mutual fund investor sells part of a position bought in several lots, and neither identifies which shares are being sold nor elects the average-basis method. Which cost-basis method do the tax rules apply?

• a.Highest cost first, so each sale reports the smallest possible gain
• b.Last in, first out, so the newest shares are treated as sold first
• c.First in, first out✓
• d.The average cost of every share in the account, applied without any election

When an investor neither identifies the shares being sold nor elects the average-basis method, the regulations charge the sale against the earliest lot bought, which is first in, first out. Highest cost first and last in, first out are not default methods; they are only possible through specific identification. Average cost is available only by election (and the old double-category variation can no longer be used), so it is not applied automatically.26 CFR 1.1012-1(c)(1); IRS Publication 550 (Special Rules for Mutual Funds)

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

A bond fund's prospectus limits it to investment-grade bonds. Which bond would the fund be allowed to buy?

• a.A bond rated BB+ by S&P Global Ratings
• b.A bond rated BB- by Fitch Ratings
• c.A bond rated BBB- by S&P Global Ratings✓
• d.A bond rated Ba1 by Moody's Ratings

Investment grade runs down to BBB- at S&P and Fitch and Baa3 at Moody's. BB+, Ba1, and B- are all below that line, which makes them speculative (high-yield) grades.Bond credit ratings

Under FINRA rules, a mutual fund may call itself no-load only if it has no front-end or deferred sales charge and its 12b-1 fees do not exceed:

• a.1.00% of average net assets a year, the combined 12b-1 cap
• b.0.25% of average net assets a year, the service fee level✓
• c.0.50% of average net assets a year, half the combined cap
• d.0.75% of average net assets a year, the asset-based sales charge cap

A fund calling itself no-load can charge no sales charge and no more than 0.25% in 12b-1 fees. The 0.75% and 1.00% figures are the caps on the sales-charge portion and the total 12b-1 fee for funds that are not no-load.FINRA Rule 2341(d)

What does tracking error measure for an index fund?

• a.The share of the fund's trades executed away from the closing NAV
• b.The gap between the fund's return and its benchmark's return✓
• c.The spread of the fund's returns around its own average return
• d.The sensitivity of the fund's return to moves in the overall market

Tracking error shows how closely an index fund follows its benchmark, and costs, cash drag, and sampling cause it. The spread of returns is standard deviation, sensitivity to the market is beta, and trade execution is unrelated.Index funds

A client compares a target-date 2060 fund with a target-date 2030 fund. Which statement is accurate?

• a.The 2060 fund holds the same mix as the 2030 fund and never changes it
• b.The 2060 fund holds less stock now and moves toward stock as 2060 nears
• c.The 2060 fund holds only bonds now and adds stock as 2060 nears
• d.The 2060 fund holds more stock now and moves toward bonds as 2060 nears✓

Target-date funds follow a glide path: they start aggressive for investors far from the date and shift to a more conservative mix as the date approaches. The 2030 fund is already well along that path, so it holds less stock than the 2060 fund.Target-date funds

An investor signs a 13-month letter of intent to invest $100,000 to earn a breakpoint, but invests only $60,000 by the end of the period. What is the result?

• a.The investor pays a 1% penalty fee, but keeps the lower sales charge on the $60,000
• b.The letter is void, so the fund refunds all of the sales charges the investor has paid
• c.A higher sales charge applies to the amount invested, adjusted from escrowed shares✓
• d.The lower $100,000 sales charge still applies, because the investor signed the letter

A letter of intent is not binding on the investor, but it is on the sales charge: if the stated amount is not reached, the sales charge is recalculated at the rate for the amount actually invested, and the fund collects the difference, usually from shares held in escrow.Letter of intent

A representative holds only the Series 6 license. Which sale is the representative permitted to make?

• a.Shares of a closed-end fund already trading on an exchange
• b.Listed call options on a mutual fund's largest stock holdings
• c.Shares of a corporation's common stock from the firm's inventory
• d.Shares of a closed-end fund during its original public offering✓

The Series 6 covers redeemable securities of registered investment companies, variable contracts, and closed-end fund shares only during the original distribution. Once a closed-end fund trades in the secondary market, selling its shares requires a broader license, as do stocks and options.FINRA Rule 1220(b)(7)(A)

A candidate passes the Securities Industry Essentials (SIE) Exam but does not become associated with a firm. How long does the SIE result remain valid?

• a.Indefinitely, because the SIE is a one-time requirement
• b.Four years from the date the candidate passed the exam✓
• c.Three years from the date the candidate passed the exam
• d.Two years from the date the candidate passed the exam

An SIE result stays valid for four years. If the candidate does not pass a related top-off exam such as the Series 6 and register within that period, the SIE must be retaken.FINRA Rule 1210; SIE

Regulation Best Interest applies when a broker-dealer recommends a securities transaction to a:

• a.corporation with over $10 million in assets that is investing money for its treasury
• b.natural person using the advice mainly for personal, family, or household purposes✓
• c.registered investment adviser that is buying securities for the advisory clients it serves
• d.municipal issuer that is hiring the firm to underwrite its new general obligation bond issue

Reg BI covers recommendations to retail customers: natural persons (and their legal representatives) using the recommendation primarily for personal, family, or household purposes. Institutional and business investors fall outside it, and the rule's definition turns on the recommendation, not on whether an account is open.Regulation Best Interest, 17 CFR 240.15l-1

Under the Care Obligation of Regulation Best Interest, how must a representative treat the cost of a recommended fund?

• a.As one factor to weigh, but not the only one that decides the recommendation✓
• b.As the deciding factor, so the lowest-cost fund must always be recommended
• c.As a factor only when the customer asks about the fees in writing
• d.As irrelevant, so only the fund's past performance may be considered

Reg BI requires reasonable diligence, care, and skill, and cost must be considered along with other factors such as the customer's objectives and the product's features. The rule does not require the cheapest product in every case, and it does not let the representative ignore cost.Regulation Best Interest, 17 CFR 240.15l-1(a)(2)(ii)

A broker-dealer must give a retail investor its Form CRS (customer relationship summary). When is it due, and how long may it be?

• a.Only when the customer requests it in writing, and no longer than ten pages in length
• b.At or before a recommendation, order, or account opening, and two pages or fewer✓
• c.At the end of each year with the account statement, and no longer than four pages
• d.Within 30 days after the account is opened, and no longer than one page in length

Form CRS must be delivered to a retail investor before or at the earliest of a recommendation, an order, or opening an account, and a broker-dealer's form is limited to two pages. It is not a post-opening or annual delivery item.Form CRS, 17 CFR 240.17a-14

A firm places a temporary hold on a disbursement from a 70-year-old customer's account because it suspects financial exploitation. The initial hold may last up to:

• a.10 business days, extendable by 5 more with a reasonable belief of exploitation
• b.15 calendar days, extendable by 15 more calendar days with the customer's consent
• c.30 business days, with no further extension allowed even if exploitation continues
• d.15 business days, extendable 10 more with a reasonable belief of exploitation✓

Rule 2165 permits a hold of up to 15 business days when a firm reasonably believes a specified adult (age 65 or older, or impaired) is being exploited. The firm may extend it by 10 business days, and a further 30 business days if it reports the matter to a state regulator or agency or a court. The extensions do not need the customer's consent.FINRA Rule 2165

When a firm opens a non-institutional account, it must make reasonable efforts to get the name and contact information of a trusted contact person. What if the customer declines to provide one?

• a.The firm may open the account only with a principal's written approval
• b.The firm must refuse to open the account until a contact is named
• c.The firm may open the account, and it need not refuse the business✓
• d.The firm must name its own representative as the trusted contact

Rule 4512 requires the firm to ask for a trusted contact person, but the customer is not obliged to provide one, so the account may still be opened. The contact is for reaching a person when exploitation or a health concern is suspected, not for authorizing trades.FINRA Rule 4512

A firm wants to share a customer's nonpublic personal information with a nonaffiliated company so that the company can market its own products. What must the firm do first?

• a.Share it freely, since an opt-out right applies only to affiliates
• b.Give the customer a privacy notice and a reasonable chance to opt out✓
• c.Obtain the customer's written opt-in consent before any sharing
• d.Notify the SEC and wait 30 days before sharing the information

Reg S-P requires a privacy notice and an opportunity to opt out before nonpublic personal information goes to nonaffiliated third parties, apart from the exceptions such as processing transactions. Opt-in consent is not the standard, and no SEC notice period applies.SEC Regulation S-P

Under FINRA Rule 3310, how often must a firm that executes customer transactions have its anti-money laundering program tested by independent personnel?

• a.Every three years, if no violations
• b.After each suspicious activity report
• c.Every two years, for every firm
• d.At least once each calendar year✓

A firm that does business with the public must test its AML program every calendar year, using qualified independent personnel or an outside party. Testing every two years is allowed only for firms that do not execute transactions for customers or hold customer accounts.FINRA Rule 3310

A broker-dealer detects suspicious activity of at least $5,000 and identifies a suspect. By when must it file the suspicious activity report?

• a.10 business days after the transaction takes place
• b.30 calendar days after the initial detection of the facts✓
• c.15 calendar days after the activity is first noticed
• d.60 calendar days after the activity is first noticed

A broker-dealer must file a SAR within 30 calendar days of initially detecting facts that may be reportable. If no suspect has been identified, it may take up to 60 days. The 15-day period belongs to currency transaction reports.31 CFR 1023.320; FinCEN