FINRA SIE — Securities Industry Essentials — All Questions

An investor buys 100 shares of a stock at $40 and, at the same time, buys one 40 put for $2.00 as a married put. What is the break-even stock price at expiration, ignoring commissions?

• a.$42.00✓
• b.$38.00
• c.$40.00
• d.$44.00

The put premium is an added cost of the stock position, so the shares must rise by the premium before the investor is even: $40.00 + $2.00 = $42.00. Strike minus premium ($38.00) is the break-even for a long put alone, not a married put. A price of $40.00 would be break-even only if the put were free. A price of $44.00 doubles the premium.

Ahead of an earnings release, an investor expects a large price move in XYZ but has no view on direction. Using options that all share one expiration, which position best fits this outlook?

• a.Buy one XYZ 50 call and sell one XYZ 55 call
• b.Buy one XYZ 50 call and one XYZ 50 put✓
• c.Write one XYZ 50 call and one XYZ 50 put
• d.Buy one XYZ 50 call and write one XYZ 50 put

Buying a call and a put with the same strike and expiration is a long straddle. It gains if the stock moves far enough in either direction, which is exactly a big-move, no-direction view. Buying one call and selling a higher-strike call is a bull spread that needs the stock to rise. Writing both a call and a put is a short straddle, which profits when the stock stays put and loses on a large move. Buying a call and writing a put at the same strike is a bullish position that loses if the stock drops.

An investor buys one XYZ 50 call for $3.00 and one XYZ 50 put for $2.50, both with the same expiration. What is the maximum possible loss on this position, and when does it occur?

• a.$250, if XYZ finishes above 50
• b.$5,000, if XYZ falls to zero
• c.$550, if XYZ finishes exactly at 50✓
• d.$300, if XYZ finishes below 50

This is a long straddle. The most the investor can lose is the total premium paid, ($3.00 + $2.50) x 100 = $550, and that loss occurs when XYZ closes exactly at the 50 strike so that both options expire worthless. Any move away from 50 makes one option worth something, and the position breaks even at 44.50 or 55.50. A $300 or $250 loss would be the premium on one leg only, but the investor paid for both. A fall to zero is the best outcome for the put, not the worst.

An investor buys one ABC 60 call for $5 and sells one ABC 65 call for $2, both with the same expiration. Which statement describes the position?

• a.A neutral position with a net cost of $300 and a maximum gain of $200
• b.A bullish credit spread with a net credit of $300 and a maximum loss of $200
• c.A bullish debit spread costing $300 net, with a $200 maximum gain✓
• d.A bearish debit spread with a net cost of $300 and a maximum gain of $200

Buying the lower-strike call and selling the higher-strike call is a bull call spread. The investor pays $5 and receives $2, a net debit of $3, or $300. The most the spread can be worth is the $5 difference between strikes, so the maximum gain is $500 - $300 = $200 and the maximum loss is the $300 paid. It is not a credit spread because money goes out on net. It is not bearish because the investor needs the stock to rise, and it is not neutral because the maximum gain requires the stock to finish at or above 65.

An investor owns 1,000 shares of XYZ, currently at $60, with a large unrealized gain. She does not want to sell yet and wants downside protection at little net cost. She sells 10 XYZ 70 calls and buys 10 XYZ 55 puts. What is this position called, and what does it do?

• a.A married put, which keeps all of the upside above the stock price
• b.A collar, which limits losses below 55 and caps gains above 70✓
• c.A covered straddle, which profits from large moves in either direction
• d.A bull spread, which profits only if XYZ rises above 70

A collar combines owning the stock with buying an out-of-the-money put for protection and selling an out-of-the-money call to help pay for it. The put sets a floor near 55, and the call caps the upside at 70, so the gains and losses are both bounded. A straddle pairs a call with a put at the same strike and is not designed around protecting stock. A married put has no short call, so the upside is not capped. A bull spread uses two calls and does not involve a put.

Which pair of positions on the same stock reflects the same market outlook?

• a.A long put and a short put
• b.A long call and a long put
• c.A long call and a short put✓
• d.A short call and a short put

A long call profits when the stock rises, and a short put also profits when the stock rises or stays above the strike, so both are bullish. A long call and a long put together make a straddle, which has no fixed direction. A short call is bearish and a short put is bullish, so that pair points in opposite directions. A long put profits when the stock falls and a short put profits when it rises or holds, so those two are opposites as well.

Section 4 of the Investment Company Act of 1940 divides registered investment companies into three classes. Which of the following is one of those classes?

• a.Real estate investment trust
• b.Face-amount certificate company✓
• c.Direct participation program
• d.Exchange-traded note issuer

Section 4 names face-amount certificate companies, unit investment trusts and management companies. A face-amount certificate company issues certificates that promise to pay a stated amount at a fixed future date, so it is one of the three. A REIT is a tax-status entity that invests in real estate and is not one of the Act's classes. A direct participation program is a pass-through business venture, usually a limited partnership, and falls outside the Act's classes. An exchange-traded note is a debt obligation of the issuing bank, not an investment company.Investment Company Act of 1940, Section 4

A diversified management company has total assets of $300 million. To meet the 75-5-10 test, what is the most it may hold in the securities of any one issuer within the 75% portion of its assets?

• a.$11.25 million
• b.$30 million
• c.$225 million
• d.$15 million✓

To be classed as diversified, a management company must hold at least 75% of its total assets in cash, government securities, other investment company shares and other securities, with no more than 5% of total assets in any one issuer and no more than 10% of that issuer's voting securities. Five percent of $300 million is $15 million. The $30 million figure applies the 10% voting-securities limit to the fund's own assets, which is a different test. The $11.25 million figure takes 5% of only the 75% portion, but the 5% limit is measured against total assets. The $225 million figure is the 75% bucket itself, not a limit on one issuer.Investment Company Act of 1940, Section 5(b)(1)

A private fund sells interests to 150 investors, all of whom are qualified purchasers, and does not make a public offering. Which statement is correct?

• a.It must register as an investment company, because it has more than 100 owners
• b.It may rely on Section 3(c)(1), because qualified purchasers are not counted toward the 100-owner limit
• c.It may rely on Section 3(c)(7), which has no 100-owner limit when all owners are qualified purchasers✓
• d.It may rely on Section 3(c)(1), because a private fund may have up to 150 owners

Section 3(c)(7) excludes a privately offered issuer whose securities are owned exclusively by qualified purchasers, and it contains no cap on the number of owners, so 150 qualified purchasers is permitted. Section 3(c)(1) does cap beneficial owners at 100 (with a separate higher cap only for qualifying venture capital funds), so 150 owners cannot rely on it. Registration is not required, because the 100-owner limit belongs only to Section 3(c)(1). Qualified purchasers are counted under Section 3(c)(1), so excluding them from the count is not an option.Investment Company Act of 1940, Section 3(c)(1) and 3(c)(7)

A fund's public offering price is $20.00 per share, and its sales charge is 4.75% of the public offering price. What is the net asset value per share?

• a.$19.09
• b.$20.95
• c.$19.05✓
• d.$15.25

Because the sales charge is a percentage of the public offering price, the NAV is the POP less that charge: $20.00 x (1 - 0.0475) = $20.00 x 0.9525 = $19.05. Dividing the POP by 1.0475 gives $19.09, which treats the charge as a percentage of NAV. Adding the charge to the POP gives $20.95, which moves in the wrong direction. Subtracting 4.75 dollars gives $15.25, which treats the percentage as a dollar amount.

A fund's public offering price is $24.00 and its net asset value is $22.56. What is the sales charge as a percentage of the public offering price?

• a.6.4%
• b.6.0%✓
• c.94.0%
• d.1.44%

The sales charge is the difference between POP and NAV: $24.00 - $22.56 = $1.44. Stated as a percentage of the public offering price, that is $1.44 / $24.00 = 6.0%. Dividing by NAV instead gives 6.4%, which uses the wrong base. The 94.0% figure is NAV as a percentage of POP, the amount that actually goes to work in the fund. The 1.44% figure is the dollar amount of the charge read as a percentage.

A client plans to hold a fund for 15 years. Class A shares carry a 5.50% front-end load and a 0.25% annual 12b-1 fee. Class C shares carry no front-end load and a 1.00% annual 12b-1 fee, with no deferred charge after the first year. Ignoring compounding and investment growth, which statement about the cost of the two classes over the full 15 years is correct?

• a.Class C costs less, because it has no front-end load
• b.Class A costs less, about 9.25% in total charges versus 15% for Class C✓
• c.The classes cost the same, because neither charges a deferred sales charge after year one
• d.Class A costs more, about 20.5% in total charges versus 15% for Class C

Class A: 5.50% once, plus 0.25% x 15 years = 3.75%, for a total of 9.25%. Class C: 1.00% x 15 years = 15%. For a long holding period the level annual charge of Class C adds up to more than the one-time load of Class A. Choosing Class C because it has no load looks only at the first day and ignores the recurring fee. The 20.5% figure charges Class A the 1.00% annual rate that belongs to Class C. The classes are not equal, because both a front-end load and annual 12b-1 fees are part of the cost.FINRA Rule 2341(d)

A fund has a net asset value of $19.00 and a 5.00% sales charge, stated as a percentage of the public offering price. An investor sends $10,000 to buy shares. How many shares does the investor receive, ignoring any breakpoint?

• a.525 shares
• b.500 shares✓
• c.475 shares
• d.526.32 shares

POP = $19.00 / 0.95 = $20.00. The investor's $10,000 buys at the public offering price: $10,000 / $20.00 = 500 shares. As a check, the sales charge is $1.00 a share (5% of $20.00), or $500 in all, and the remaining $9,500 buys 500 shares at $19.00 of NAV. Dividing by NAV gives 526.32 shares, which ignores the sales charge. The 475 figure takes the charge out of the money twice. The 525 figure adds 5% to 500 shares, which has the charge going the wrong way.

A client buys $20,000 of Class B shares. The deferred sales charge is 5%, 4%, 3%, 2% and 1% in years one through five, charged on the original $20,000 purchase amount. The client redeems everything during the third year, when the shares are worth $24,000. What is the deferred sales charge?

• a.$600✓
• b.$800
• c.$1,000
• d.$720

Redeeming during the third year puts the client in the 3% bracket. The charge is applied to the original purchase amount of $20,000, so 3% x $20,000 = $600. Using 4% ($800) treats the third year as the second. Applying 3% to the current value of $24,000 ($720) uses the wrong base, which the schedule in this question does not allow. Using 5% ($1,000) applies the first-year rate, which only applies to a redemption in the first year.

A customer with $55,000 to invest buys $49,000 of a fund just below a $50,000 breakpoint. When FINRA reviews whether this was a breakpoint sale, which record would best support the member's position that it was not?

• a.Records showing the trade followed a bona fide asset allocation program the member offers, with disclosure that breakpoint reductions might not be available✓
• b.A note that the customer verbally agreed to pay the higher sales charge on the $49,000
• c.A statement that the customer had never owned shares of that fund family before
• d.A copy of the prospectus page that lists the fund's breakpoint schedule

Rule 2342(b) says FINRA will look at the facts and circumstances, including whether the member retained records showing the trade was executed under a bona fide asset allocation program that is designed to meet customers' diversification needs and investment goals, and under which the member discloses that customers may not qualify for breakpoint reductions. A verbal agreement to pay the higher charge is not the kind of record the rule describes, and a customer cannot easily waive the protection. The prospectus schedule shows the breakpoint exists, which is exactly what makes a purchase just below it suspect. A first-time purchase says nothing about why the amount was chosen.FINRA Rule 2342(b)

A fund family offers a reduced sales charge at $50,000, and its prospectus says that rights of accumulation count the current value of existing holdings. A client's existing shares cost $32,000 and are now worth $40,000. The client wants to add $15,000 in the same family. Does the new purchase qualify for the reduced charge?

• a.No, because cost of $32,000 plus $15,000 is $47,000, below the breakpoint
• b.No, because only the new $15,000 purchase counts toward the breakpoint
• c.Yes, because the current value of $40,000 plus $15,000 is $55,000, above the breakpoint✓
• d.Yes, but only if the client first signs a letter of intent

Under the fund's stated rule, rights of accumulation count the current value of what the client already owns, so the test is $40,000 + $15,000 = $55,000, which clears the $50,000 breakpoint. Using the original cost of $32,000 reaches only $47,000, but the prospectus in this question measures by current value. Counting only the new purchase ignores the whole point of rights of accumulation. A letter of intent is for future purchases the client commits to make; it is not required to count shares already held.

A mutual fund calculates its NAV once a day at 4:00 p.m. ET. A customer places an order to buy shares at 4:45 p.m. ET on Tuesday. At what price will the order be executed?

• a.The NAV calculated on Tuesday at 4:00 p.m., plus any applicable sales charge
• b.The price when Wednesday's market opens
• c.The NAV next calculated on Wednesday, plus any applicable sales charge✓
• d.The average of Tuesday's and Wednesday's NAV

Mutual fund shares are forward priced. Under Rule 22c-1, a purchase or redemption is made at the current NAV that is next computed after the fund or its agent receives the order. An order that arrives at 4:45 p.m. is after Tuesday's calculation, so it gets the next one, which is Wednesday's. Tuesday's NAV is already history by the time the order comes in. A fund does not average two NAVs. Fund shares do not trade at market prices, so there is no opening price to use.SEC Rule 22c-1

A fund charges a sales charge of 5.5% on purchases under $50,000 and 4.5% on purchases from $50,000 to $99,999, applied to the entire purchase. A customer makes a single $60,000 purchase. What sales charge does the customer pay, and how much does the breakpoint save compared with the 5.5% rate?

• a.$2,250, which saves $1,050
• b.$3,300, which saves nothing
• c.$3,200, which saves $100
• d.$2,700, which saves $600✓

At $60,000 the customer is in the 4.5% bracket, and the stem says that rate applies to the whole purchase: 4.5% x $60,000 = $2,700. At 5.5% the charge would have been $3,300, so the breakpoint saves $600. A $3,200 charge treats the lower rate as applying only to the dollars above $50,000. A $2,250 charge applies 4.5% to the first $50,000 only. A $3,300 charge simply ignores that the customer has reached the breakpoint.

A client expects to invest $20,000 now and about $40,000 more over the next year, all in one fund family whose breakpoint is $50,000. The client wants the reduced sales charge from the first purchase. Which feature fits?

• a.Rights of accumulation, which count only holdings already owned
• b.A contingent deferred sales charge, which lowers the charge on later purchases
• c.Dollar-cost averaging, which sets the sales charge by the number of purchases
• d.A letter of intent, stating the total the client plans to invest✓

The SEC describes letters of intent and rights of accumulation as the two principal ways to reach breakpoints through purchases aggregated over time. A letter of intent is a statement that the client intends to invest a stated amount, and it is the tool for purchases that have not happened yet, so it fits a plan to buy $60,000 in total. Rights of accumulation look back at what the client already holds and would not help with the first $20,000. A CDSC is a charge on redemption, not a way to reduce a front-end charge. Dollar-cost averaging is an investing method and has no effect on the sales charge schedule.FINRA Rule 2341 (sales charges); SEC/FINRA investor bulletin on mutual fund breakpoints

A mutual fund has average net assets of $400 million for the year. Its management fee was $2.4 million, 12b-1 fees were $1.0 million and other administrative costs were $0.6 million. What is the fund's expense ratio?

• a.0.40%
• b.0.85%
• c.1.00%✓
• d.0.60%

The expense ratio is total annual operating expenses divided by average net assets. Total expenses are $2.4 million + $1.0 million + $0.6 million = $4.0 million, and $4.0 million / $400 million = 1.00%. The 0.60% figure counts only the management fee. The 0.85% figure leaves out the administrative costs. The 0.40% figure leaves out the management fee, which is normally the largest piece.

Fund A has an annual expense ratio of 1.40% and Fund B has 0.40%. An investor puts $20,000 in each and the funds earn identical gross returns. Ignoring compounding, how much more does Fund A charge in expenses over 10 years?

• a.$200
• b.$2,800
• c.$2,000✓
• d.$800

The gap in expense ratios is 1.40% - 0.40% = 1.00%. On $20,000, that is $200 a year, and over 10 years it comes to $2,000. The $200 figure is a single year only. The $2,800 figure is Fund A's total 10-year expenses (1.40% x $20,000 x 10), not the difference between the funds. The $800 figure is Fund B's 10-year expenses.

A fund's advisory fee schedule is 0.80% on the first $100 million of net assets, 0.60% on the next $100 million and 0.50% on assets above $200 million. What annual advisory fee does a fund with $260 million of average net assets pay?

• a.$2.08 million
• b.$1.6 million
• c.$1.3 million
• d.$1.7 million✓

A tiered schedule charges each rate only on its own slice of assets: $100 million x 0.80% = $0.8 million, $100 million x 0.60% = $0.6 million and $60 million x 0.50% = $0.3 million. The total is $1.7 million. Charging 0.80% on all $260 million gives $2.08 million, and charging 0.50% on everything gives $1.3 million, which ignore the tiers. The $1.6 million figure applies 0.50% to all $160 million above the first $100 million, skipping the middle tier's 0.60%.

A fund imposes a 2% redemption fee on shares sold within 60 days of purchase. An investor redeems $20,000 of shares after 45 days. What is the fee, and who keeps it?

• a.$400, retained by the fund for the benefit of remaining shareholders✓
• b.$40, retained by the fund for the benefit of remaining shareholders
• c.$400, paid to the investment adviser as an added management fee
• d.$400, paid to the principal underwriter as an added sales charge

The sale falls inside the 60-day window, so the fee is 2% x $20,000 = $400. Rule 22c-2 caps a redemption fee at 2% and requires that the fee be retained by the fund, so it protects the remaining shareholders from the trading costs of short-term traders. It is not a sales charge that goes to the underwriter, and it is not additional compensation for the adviser. The $40 figure misplaces the decimal and charges 0.2%.SEC Rule 22c-2

An investor bought mutual fund shares four months ago. The fund pays a capital gain distribution and the investor reinvests it in more shares. How is the distribution taxed for the year it is paid?

• a.As ordinary dividend income, because it was paid by a fund instead of a stock sale
• b.As a short-term capital gain, because the shares were held less than one year
• c.As a long-term capital gain despite only four months of ownership✓
• d.It is not taxed until the new shares are sold, because it was reinvested

A capital gain distribution reported by the fund is treated by the shareholder as gain on an asset held more than one year, no matter how long the shareholder has owned the fund shares. The four-month holding period matters only when the investor later sells shares. A fund's distribution of short-term gains is reported as an ordinary dividend, not as a capital gain distribution, so the character of this payment does not change because it came from a fund. Reinvestment does not defer anything: a reinvested distribution is taxed in the year paid exactly as if it had been taken in cash.IRC Section 852(b)(3)(B); IRS Topic 404

An investor buys 500 mutual fund shares at $20.00. The fund later pays a $1.00 per share distribution, which the investor reinvests at a NAV of $20.00 and reports as taxable income. The investor then sells all shares at $22.00. What is the taxable gain on the sale?

• a.$550
• b.$1,000
• c.$1,550
• d.$1,050✓

The reinvested distribution is $500 (500 shares x $1.00), which buys 25 more shares at $20.00, so the investor now owns 525 shares. Proceeds are 525 x $22.00 = $11,550. Because the distribution was taxed when paid, the $500 reinvested is added to the original $10,000 cost, giving a basis of $10,500, and the gain is $1,050. A gain of $1,550 ignores the added basis and taxes the distribution twice. A gain of $1,000 leaves out the 25 reinvested shares. A gain of $550 subtracts the reinvested amount from the basis a second time.IRS Publication 550 (Dividends Used to Buy More Stock)

A regulated investment company has $10 million of investment company taxable income for the year. What is the minimum it must distribute to shareholders to qualify for pass-through treatment under Subchapter M?

• a.$7.5 million
• b.$9.0 million✓
• c.$10.0 million
• d.$8.0 million

A regulated investment company keeps its conduit treatment only if it pays out at least 90% of its investment company taxable income, and 90% of $10 million is $9.0 million. Distributing the entire $10.0 million is allowed but is not the minimum. The $8.0 million and $7.5 million figures apply 80% and 75%, which are thresholds from other fund rules (the 80% names rule and the 75% test for diversification) and not the distribution requirement. Income retained above the minimum is taxed at the fund level.IRC Section 852(a)(1)

An investor in a national municipal bond fund receives $400 of exempt-interest dividends and a $100 capital gain distribution for the year. Ignoring state taxes and the alternative minimum tax, how much is subject to federal income tax?

• a.$0, because the fund holds only municipal bonds
• b.$400, the dividends paid from bond interest
• c.$500, because all fund distributions are taxable
• d.$100, the capital gain distribution only✓

An exempt-interest dividend, which a fund may pay when at least half its assets are in tax-exempt obligations, passes the exclusion from federal income tax through to shareholders. The statute defines an exempt-interest dividend as a dividend other than a capital gain dividend, so the $100 capital gain distribution does not share that exclusion and is taxed as a long-term capital gain. Taxing all $500 treats the exempt interest as ordinary income. Taxing $400 reverses the two pieces. Taxing nothing assumes a municipal fund's gains are exempt, but only the interest is.IRC Section 852(b)(5)

A money market fund has $3 billion in total assets. What is the minimum it must hold in cash, government securities and fully collateralized repurchase agreements to be a government money market fund?

• a.$2.400 billion
• b.$2.985 billion✓
• c.$2.970 billion
• d.$2.850 billion

Rule 2a-7 defines a government money market fund as one that invests 99.5% or more of its total assets in cash, government securities and fully collateralized repurchase agreements, and 99.5% of $3 billion is $2.985 billion. The $2.850 billion figure applies 95%, and $2.400 billion applies the 80% used in the names rule. The $2.970 billion figure applies 99%, which falls just short of the threshold and would leave the fund unable to use the government label.17 CFR 270.2a-7(a)(14)

An institutional prime money market fund has $10 billion in net assets. On one business day, shareholders redeem a net $600 million. What does Rule 2a-7 require of the fund?

• a.Nothing, because the mandatory fee threshold is 10% of net assets
• b.Apply a liquidity fee to all shares redeemed at that day's price✓
• c.Charge the fee only on redemptions above 5% of net assets
• d.Suspend redemptions until the next business day

Net redemptions of $600 million are 6% of $10 billion, which exceeds the 5% daily trigger. A money market fund that is neither a government fund nor a retail fund must then apply a liquidity fee, based on a good-faith estimate of its liquidity costs, to every share redeemed at the price computed that day. Rule 2a-7 no longer includes a redemption suspension for these funds. The fee is not limited to the portion above the trigger, and the trigger is 5%, not 10%, so doing nothing would violate the rule.17 CFR 270.2a-7(c)(2)(ii)

An interval fund with 40 million shares outstanding on the repurchase request deadline sets its quarterly repurchase offer at the smallest amount Rule 23c-3 allows. How many shares must it offer to repurchase?

• a.10 million shares
• b.4 million shares
• c.2 million shares✓
• d.8 million shares

Rule 23c-3 requires a repurchase offer amount of not less than 5% nor more than 25% of the shares outstanding on the repurchase request deadline, and 5% of 40 million shares is 2 million shares. The 4 million figure is 10%, the 8 million figure is 20% and the 10 million figure is 25%, the maximum. Each of those is inside the permitted range but none is the smallest amount the rule allows.17 CFR 270.23c-3(a)(3)

The Heartland Small-Cap Value Fund has $500 million in assets. Under the SEC names rule, how much must it normally invest in small-cap value investments?

• a.At least $450 million
• b.At least $350 million
• c.At least $250 million
• d.At least $400 million✓

Rule 35d-1 applies to a fund whose name suggests a particular investment focus, including terms such as value or growth. The fund must adopt a policy to invest, under normal circumstances, at least 80% of the value of its assets in investments matching that focus, and 80% of $500 million is $400 million. The $250 million figure is 50%, the $350 million figure is 70% and the $450 million figure is 90%. None of those is the percentage the rule sets.17 CFR 270.35d-1(a)(2)

A client wants a money market fund that holds a stable $1.00 share price using amortized cost. Which fund can do that?

• a.An institutional prime money market fund
• b.An institutional tax-exempt money market fund
• c.Any money market fund registered under the Investment Company Act
• d.A government money market fund✓

Only government and retail money market funds may use amortized cost or penny rounding to keep a stable price per share. Every other money market fund must price its shares by rounding NAV to at least the fourth decimal place, so an institutional prime fund or an institutional tax-exempt fund has a floating NAV. Being registered under the Investment Company Act is not enough, because the stable price depends on the type of fund and not on registration.17 CFR 270.2a-7(c)(1)

A firm's office of supervisory jurisdiction receives a complete and correct application package for a deferred variable annuity on Wednesday, March 4, 2026. Assume no holidays and that the firm waits as long as the rule permits. By what date must a registered principal review the transaction?

• a.Wednesday, March 11, 2026
• b.Thursday, March 12, 2026
• c.Friday, March 13, 2026✓
• d.Monday, March 16, 2026

Rule 2330 requires a principal to review the application before it is sent to the insurer and no later than seven business days after the office of supervisory jurisdiction receives a complete and correct package. Counting from March 4, the seven business days are March 5, 6, 9, 10, 11, 12 and 13, so the deadline is Friday, March 13. March 11 counts seven calendar days and so includes the weekend. March 12 stops at six business days. March 16 is the eighth business day and would be late.FINRA Rule 2330(c)

Who sets the minimum length of the free-look period during which a newly issued annuity contract can be cancelled for a refund?

• a.The insurer, which may offer any period it chooses, including none
• b.The SEC, which fixes one period for every annuity sold nationally
• c.FINRA, through the principal review timing in Rule 2330
• d.State insurance law, so the period varies from state to state✓

A free-look provision is a feature of the insurance contract, and the minimum length is set by state insurance law. FINRA notes that it typically ranges from 10 to 30 days depending on the state. The SEC does not fix a single national period. Rule 2330 governs principal review of recommendations, and its seven-business-day deadline has nothing to do with the buyer's right to cancel. An insurer cannot choose to offer none, because state law requires the provision.

A 40-year-old client wants to fund an IRA by buying a variable annuity inside it, mainly for the tax deferral. What should the representative make sure the client understands?

• a.Putting the annuity in an IRA gives the client two layers of tax deferral
• b.Tax deferral on the annuity ends at age 59½ unless it sits inside an IRA
• c.Earnings in an annuity held inside an IRA come out tax-free in retirement
• d.The IRA already defers tax, so the annuity adds no further tax benefit and its fees still apply✓

Earnings in an IRA already grow tax-deferred, so wrapping an annuity inside it adds no extra deferral. The client would still pay the annuity's mortality and expense, advisory and rider charges, which is why the decision has to rest on the annuity's other features, such as a death benefit or guaranteed income. The claim of two layers of deferral is the common misunderstanding. Annuity earnings inside a traditional IRA are taxed as ordinary income when withdrawn, and the age 59½ rule concerns an early-withdrawal penalty, not the end of deferral.FINRA Rule 2330(b)(1)

A client with a nonqualified annuity wants to exchange it without recognizing the gain. Under IRC Section 1035, which exchange qualifies?

• a.An annuity contract for shares of a mutual fund
• b.An annuity contract for a bank certificate of deposit
• c.An annuity contract for another annuity✓
• d.An annuity contract for a life insurance policy

Section 1035 lets an annuity contract be exchanged for another annuity contract, or for a qualified long-term care contract, with no gain or loss recognized. The rule runs in one direction: a life insurance contract can be exchanged for an annuity, but an annuity cannot be exchanged for a life insurance policy tax-free. Mutual fund shares and certificates of deposit are not insurance contracts, so moving into either one is a taxable surrender of the annuity.IRC Section 1035(a)(3)

A customer's annuity has a contract value of $80,000. The surrender charge is 7% in contract year 1 and drops one percentage point each year. The contract has no free-withdrawal provision. What is the surrender charge if the customer surrenders the entire contract during contract year 3?

• a.$4,000✓
• b.$3,200
• c.$4,800
• d.$5,600

The charge falls from 7% in year 1 to 6% in year 2 and 5% in year 3, and 5% of $80,000 is $4,000. With no free-withdrawal provision, the charge applies to the whole amount withdrawn. The $4,800 figure uses the year 2 rate and the $5,600 figure uses the year 1 rate, both of which lag the schedule by a year or two. The $3,200 figure uses the year 4 rate, which jumps ahead of the schedule.FINRA Rule 2330(b)(1)(B)

A representative recommends that a customer exchange her deferred variable annuity for a new one. Under Rule 2330, the review of the exchange must consider whether the customer has had another deferred variable annuity exchange within what preceding period?

• a.12 months
• b.24 months
• c.60 months
• d.36 months✓

Rule 2330 lists several factors the firm must weigh in an exchange: surrender charges on the old contract, a new surrender period, loss of existing benefits, increased fees, and whether the customer has had another deferred variable annuity exchange within the preceding 36 months. The 12-month and 24-month periods are shorter than the rule's look-back and would miss exchanges the rule counts, and the 60-month period is longer than the rule requires.FINRA Rule 2330(b)(1)(B)

After annuitizing a variable annuity, a retiree owns 240 annuity units. Last month the annuity unit value was $10.00 and this month it is $9.50. The accumulation unit value is $15.20. What is this month's payment?

• a.$2,400
• b.$3,648
• c.$2,340
• d.$2,280✓

Once the contract is annuitized, the payment equals the number of annuity units times the current annuity unit value: 240 x $9.50 = $2,280. The number of annuity units stays fixed and the unit value changes with performance relative to the assumed interest rate, so the payment is not locked at last month's $2,400. Averaging the two unit values to get $9.75 and a $2,340 payment has no basis. The $3,648 figure multiplies by the accumulation unit value, which applies only before annuitization.

A married 65-year-old man wants his annuity payments to continue for as long as either he or his wife is alive. Which payout option fits?

• a.Period certain of 20 years, which pays for a fixed term
• b.Life with 10 years certain, which pays at least ten years
• c.Life only, which pays until the annuitant's death
• d.Joint and last survivor, which pays until the second death✓

A joint and last survivor option keeps paying until both annuitants have died, so the wife is covered for her lifetime if she outlives him. A life-only option stops at his death and pays the largest monthly amount for that reason. Life with 10 years certain guarantees ten years of payments to a beneficiary but ends after that if the annuitant has died, so it does not cover the wife for life. A 20-year period certain pays for a fixed term whether or not either spouse is alive and ends even if both are still living.

A 529 account meets every condition for a rollover to the beneficiary's Roth IRA. Earlier rollovers from 529 accounts to this beneficiary's Roth IRA total $22,000. Ignoring the annual limit, what is the most that can still be rolled over?

• a.$35,000, because the cap applies separately to each 529 account
• b.$10,000, which is the lifetime cap for student loan repayment
• c.$13,000, the part of the $35,000 lifetime cap not yet used✓
• d.$22,000, matching the amount already rolled over

The tax code caps the total of these Roth rollovers at $35,000 for the beneficiary over all years and all 529 accounts combined, so $35,000 minus the $22,000 already moved leaves $13,000. The cap is not per account and does not reset. The $22,000 figure is simply the amount used. The $10,000 figure belongs to a different rule, the lifetime limit on 529 money used to repay student loans.IRC Section 529(c)(3)(E)

A parent opened a 529 account for a child 12 years ago, and every contribution is more than five years old. The parent asks a registered representative whether funds can be moved to the child's Roth IRA now. What is the correct answer?

• a.Yes, up to the annual Roth IRA limit, because all contributions are over five years old
• b.Not yet, because the account must be 15 years old✓
• c.Yes, but only the earnings, since contributions were already taxed
• d.Never, because a 529 account cannot be rolled into any Roth IRA

The Roth rollover rule has several conditions at once: the account must have been maintained for 15 years, the money moved must come from contributions (and their earnings) made more than five years earlier, the transfer must go directly to the beneficiary's Roth IRA, and annual and lifetime caps apply. Meeting the five-year test does not satisfy the 15-year test, and at 12 years the account is three years short. The rollover is not limited to earnings, and it is allowed once the conditions are met, so it is not prohibited outright.IRC Section 529(c)(3)(E)

For 2026 the annual gift tax exclusion is $19,000 per donor for each recipient. A grandmother who has made no other gifts to a grandchild makes the five-year election for a single 529 contribution. What is the largest contribution that can be covered by the exclusions in the election?

• a.$95,000, which is five times the annual exclusion✓
• b.$114,000, because the election covers the current year plus five more years
• c.$76,000, because the current year is excluded from the election
• d.$19,000, because the exclusion cannot be accelerated

The election lets a donor treat a large 529 contribution as if it were made in equal parts over five years, so the contribution can be as much as five times the annual exclusion: 5 x $19,000 = $95,000. Limiting it to one year's exclusion ignores the election. The current year is one of the five years, not an extra year, so the multiplier is five rather than four or six.IRC Section 529(c)(2)(B)

A 529 account is worth $50,000, made up of $30,000 of contributions and $20,000 of earnings. The owner takes a $10,000 withdrawal that is not for a qualified expense, and no exception applies. What is the 10% additional tax on this withdrawal?

• a.$400, because 40% of the withdrawal is earnings✓
• b.$1,000, because the tax applies to the whole withdrawal
• c.$2,000, because the tax applies to all the earnings in the account
• d.$4,000, because the earnings portion is the amount of the additional tax

A non-qualified withdrawal is split between contributions and earnings in the same proportion as the account: earnings are $20,000 of $50,000, or 40%, so $4,000 of this withdrawal is earnings. The earnings are taxed as ordinary income and the additional tax is 10% of that amount, or $400. Contributions come back tax-free and are outside the penalty. Applying the percentage to the whole withdrawal, or to all earnings in the account, overstates the tax. The $4,000 is the taxable earnings, not the additional tax.IRC Section 529(c)(3)(A) and (c)(6)

A 529 plan distribution used to repay a beneficiary's qualified education loans has a $10,000 lifetime limit for that individual. The beneficiary has already used $6,000 of it on her own loans. What is the most that can still be treated as a qualified expense for her own loans?

• a.$4,000, the unused part of the lifetime limit✓
• b.$10,000, because the limit applies to each loan separately
• c.$6,000, matching the amount already used
• d.$16,000, which adds the used amount to the limit

The limit is a lifetime total for each individual, not a per-loan or yearly amount, so $10,000 less the $6,000 already used leaves $4,000. Treating it as a fresh $10,000 for each loan ignores that it is cumulative. The $6,000 figure is what has been used. Adding the used amount to the limit gets the arithmetic backward, since using the limit reduces what remains.IRC Section 529(c)(9)(B)

An account owner changed a 529 account's investment option in March and again in July of the same year. In October the owner wants to move to a more conservative option in the same plan, with no change of beneficiary and no rollover. What is the result under the federal rule?

• a.Not allowed until the next calendar year, because only two changes per calendar year are permitted✓
• b.Allowed, but only into a money market or stable value option
• c.Allowed, because changes are restricted only if made within 90 days of each other
• d.Allowed, because federal law permits one change each quarter

Federal law lets a 529 plan owner redirect the investment of existing contributions no more than twice in a calendar year, apart from a change of beneficiary or a rollover. March and July used both changes, so an October change must wait for the next calendar year. Federal law has no quarterly allowance, no 90-day spacing rule, and no exception for a particular kind of option.IRC Section 529(b)(4)

A 38-year-old receives Social Security Disability Insurance benefits. The disability began when she was 30. She asks a registered representative whether she can open an ABLE account. What is the correct response?

• a.No, because the disability must have begun before age 26
• b.Yes, because her disability began before age 46 and she receives Social Security disability benefits✓
• c.No, because only recipients of Supplemental Security Income qualify
• d.No, because an ABLE account can be opened only for a person under 18

An individual is eligible if entitled to Social Security benefits based on blindness or disability under title II (SSDI) or title XVI (SSI) and the condition began before age 46. The age-26 cutoff was the earlier rule and no longer applies. Eligibility is not limited to SSI recipients, and there is no under-18 requirement. A disability certification filed with the Treasury is a separate route for people who do not receive those benefits.IRC Section 529A(e)(1)

The designated beneficiary of an ABLE account has died. The account still holds money after all outstanding qualified disability expenses are paid. What may a state do?

• a.File a claim against the remaining balance to recover Medicaid costs paid after the account was opened✓
• b.Claim only the earnings, because contributions belong to the original contributors
• c.Take the entire balance, whatever the amount of Medicaid assistance provided
• d.Nothing, because ABLE account assets pass only to heirs and are protected from state claims

An ABLE account has a Medicaid payback rule: after the beneficiary's death, and after outstanding qualified disability expenses, a state can file a claim for the remaining balance up to the total medical assistance paid for the beneficiary since the account was established, net of certain premiums. The account is therefore not shielded from every state claim. The state's claim is limited to the Medicaid paid, not the whole balance. It reaches contributions as well as earnings, so it does not stop at earnings.IRC Section 529A(f)

An investor holds a limited partnership interest in a direct participation program and has $18,000 of suspended passive losses from it. The investor sells the entire interest to an unrelated buyer in a fully taxable transaction. What happens to the suspended losses?

• a.They transfer to the buyer along with the partnership interest
• b.They stay suspended until the investor has passive income from another partnership
• c.They are released and can be deducted against any kind of income in the year of sale✓
• d.They are limited to $3,000 a year, like net capital losses

When a taxpayer disposes of the entire interest in a passive activity in a fully taxable transaction with an unrelated party, the loss is no longer treated as passive, so the suspended amounts can offset other income, including wages and portfolio income. Staying suspended is the result when a passive activity is kept, not sold. The $3,000 cap belongs to the capital loss rules, which do not govern passive losses. The losses stay with the seller and do not move to the buyer.IRC Section 469(g)(1)

A limited partner owns 10% of a direct participation program. The partnership has $100,000 of net income for the year and distributes $4,000 in cash to this investor. How much income does the investor report from the partnership on the year's Schedule K-1?

• a.$10,000, the investor's share of income✓
• b.$4,000, since income is taxed only when cash is received
• c.$0, because the partnership itself pays the tax
• d.$100,000, because the partnership reports all of its income to every partner

A partnership is a pass-through entity that pays no income tax. Each partner reports a share of its income whether or not cash is distributed, so the investor reports 10% of $100,000, or $10,000. Income is not taxed only when distributed, which means the $4,000 cash is not the measure. Because the tax falls on the partners, saying the partnership itself pays is wrong. Each partner reports only the share allocated to him or her, not the total.IRC Sections 701 and 702(a)