Business PracticesQuestion 75 of 100
An agent urges a client to buy a mutual fund now because 'the fund pays a big distribution next week and you'll pick up extra income.' This sales tactic is:
a.Sound advice, because the client receives cash sooner
b.Acceptable if the fund is otherwise suitable
c.Acceptable because the distribution is publicly announced
d.Selling dividends, a prohibited practice, because the share price drops by the distribution amount and the investor gains nothing while incurring a tax liability
Explanation
Selling dividends is prohibited because the net asset value falls by the amount of the distribution on the ex-date, so the investor simply converts principal into a taxable payment. Framing an imminent distribution as a reason to buy misrepresents the economics of the transaction. Public disclosure of the distribution and general suitability of the fund do not make the pitch acceptable.
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