FINRA Series 6 — All Questions

In a customer arbitration, a respondent firm ignores two panel orders to produce documents, even after a warning and a monetary sanction. What is the strongest step the panel may take under the Code?

• a.Suspend the firm's FINRA membership until the documents have been produced to the panel
• b.Bar the firm's associated persons from the industry until the firm complies with the orders
• c.Dismiss the firm's defense, or the whole arbitration, with prejudice for material and intentional noncompliance✓
• d.Assess a fine payable to FINRA, since sanctions in arbitration go to the forum rather than to a party

Rule 12212(c) lets the panel dismiss a claim, defense or arbitration with prejudice as a sanction for material and intentional failure to comply with an order when prior warnings or sanctions have proven ineffective. Panels sanction parties inside the case: monetary penalties are payable to one or more parties, not to FINRA. Suspending membership or barring persons are disciplinary sanctions under Rule 8310, and the panel's role there is limited to a disciplinary referral at the end of the case.FINRA Rule 12212(a), (c)

A customer lived in Ohio when the events behind her claim occurred and has since moved to Arizona. Which hearing location will the Director generally select for her arbitration?

• a.The hearing location closest to her residence on the date the claim is filed
• b.FINRA's New York location, which hears all customer cases involving more than one state
• c.The FINRA hearing location closest to where she lived when the events occurred✓
• d.The hearing location closest to the respondent firm's principal office

Rule 12213(a)(1) directs the Director generally to select the hearing location closest to the customer's residence at the time of the events giving rise to the dispute. The firm's office and the customer's later address do not drive the choice, and the Code has no single national location for multistate disputes. Before arbitrator lists are sent, the parties may agree in writing to a different location.FINRA Rule 12213(a)(1)

A customer's claim is for $80,000, exclusive of interest and expenses. How many arbitrators decide the claim under the Code?

• a.Three, because every claim above $50,000 must be heard by a full panel
• b.Three, unless all of the parties agree in writing to one
• c.One arbitrator, unless the parties agree in writing to three✓
• d.One, and the parties have no option to agree on a different number

Rule 12401(b) provides that a claim of more than $50,000 but not more than $100,000 is heard by one arbitrator unless the parties agree in writing to three. The three-arbitrator default belongs to claims above $100,000, unspecified claims and non-monetary claims, which can go to one arbitrator only by written agreement. The $50,000 mark is the simplified-procedure ceiling, not the point at which a full panel is mandatory.FINRA Rule 12401(b)

A customer files a $40,000 claim against a member and does not ask for a hearing. How is the claim decided?

• a.By one arbitrator after a hearing, since every customer arbitration includes at least one session
• b.By a three-arbitrator panel after an initial prehearing conference and a hearing on the merits
• c.By a single arbitrator on the written pleadings and other materials, with no hearing held✓
• d.By a FINRA staff attorney, who issues a binding award without appointing an arbitrator

Rule 12800 applies simplified arbitration to claims of $50,000 or less, exclusive of interest and expenses. Unless the customer requests a hearing, one arbitrator decides on the pleadings and other submitted materials, and no prehearing conference is held. Panels of three apply to larger claims. Hearings are not mandatory in simplified cases, and awards are made by arbitrators, not staff.FINRA Rule 12800(a), (c)

A member receives a monetary arbitration award it believes is wrong. Which statement about the member's position under the Code is accurate?

• a.The award is final and not subject to appeal, and it must be paid within 30 days of receipt unless a motion to vacate is filed in court✓
• b.The member may appeal to a FINRA review panel within 30 days, and payment is postponed until that appeal is decided
• c.The member may ask the original panel to reconsider within 30 days, and payment is postponed while the request is pending
• d.The award is final, but the member may hold payment for 90 days while it decides whether to move to vacate

Rule 12904(b) makes awards final and not subject to review or appeal unless applicable law directs otherwise, and paragraph (j) requires payment within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. The Code has no internal appeal or reconsideration step that suspends payment, and it does not give a 90-day grace period. An unpaid award also begins to bear interest when it is not paid within 30 days.FINRA Rule 12904(b), (j)

A small broker-dealer buys bonds from a member firm and files a claim under the Customer Code alleging the sales were unsuitable. Why is the claim not covered by the Customer Code?

• a.Claims about bond purchases are arbitrated only under the rules of the MSRB
• b.Only natural persons can be customers, so no entity may use the Customer Code
• c.The Code defines a customer so that it does not include a broker or dealer✓
• d.The claimant held only an omnibus account, and customer status requires an individual account

Rule 12100(k) states that a customer does not include a broker or dealer, so a dispute between broker-dealers is handled under the Industry Code instead. Entities such as corporations and trusts can be customers, so the claim does not fail because the claimant is not a natural person. The MSRB does not run an arbitration forum that displaces FINRA's for bond purchases, and the Code does not turn on account type.FINRA Rule 12100(k)

A member's office of supervisory jurisdiction closes a written customer complaint file in October 2026. For how long must the complaint records be preserved under Rule 4513?

• a.At least four years, in a separate file kept at each OSJ✓
• b.At least six years, the Rule 17a-4(c) period for account records
• c.At least three years, the Rule 17a-4(b) period for order memoranda
• d.At least two years from the date the complaint is resolved

Rule 4513 requires customer complaint records to be preserved for at least four years. Three years is the retention period Rule 17a-4(b) sets for order memoranda, and six years is the period that applies to account records, so each belongs to a different record. There is no five-year complaint period.FINRA Rule 4513

On Wednesday, September 2, 2026, a member learns that one of its registered representatives has pleaded guilty to a felony. By what date must the member report the event to FINRA under Rule 4530(a)?

• a.Thursday, September 17, 2026, which is 15 calendar days after the member learned of it
• b.Monday, October 12, 2026, which is the first quarter-end reporting date for the event
• c.Wednesday, December 2, 2026, which is 90 calendar days after the member learned of it
• d.Friday, October 2, 2026, which is 30 calendar days after the member learned of it✓

Rule 4530(a) requires a member to report promptly, and in any event not later than 30 calendar days, after it knows or should have known of the event, and a guilty plea to a felony is a listed event. Thirty days from September 2 is October 2. The 15th-of-the-month date belongs to quarterly complaint statistics, not event reports, and no quarter-end date applies to this report. Ninety days is longer than the rule allows.FINRA Rule 4530(a)(1)(E)

A customer writes that a representative forged her signature on a withdrawal request. The firm is still investigating, no loss has been quantified, and nothing has been filed on the representative's Form U4. Must the firm report the complaint to FINRA under Rule 4530?

• a.No, because complaints are reported only in the quarterly statistical summary under Rule 4530(d)
• b.No, a report is due only after the investigation substantiates the forgery allegation
• c.Yes, but only if the alleged loss exceeds $15,000, the threshold for reportable civil claims
• d.Yes, within 30 calendar days after it knew or should have known of the complaint, whatever the amount involved✓

Rule 4530(a)(1)(B) makes a written customer complaint alleging theft, misappropriation or forgery reportable within 30 calendar days after the member knows or should have known of it. The allegation alone triggers the duty, with no dollar threshold and no wait for the firm's findings. Quarterly statistics under paragraph (d) are an additional report and do not replace this one. The $15,000 figure applies only to civil litigation or arbitration disposed of by judgment, award or settlement.FINRA Rule 4530(a)(1)(B)

A member receives a written customer complaint on Wednesday, August 12, 2026. By what date must the member include it in its quarterly statistical and summary complaint report to FINRA?

• a.Tuesday, September 15, 2026, the 15th day of the month after the month in which it was received
• b.Monday, November 16, 2026, the 15th day of the second month after quarter-end
• c.Friday, September 11, 2026, which is 30 calendar days after the complaint was received by the firm
• d.Thursday, October 15, 2026, the 15th day after the quarter in which it was received✓

Rule 4530(d) requires statistical and summary complaint information by the 15th day of the month following the calendar quarter in which the complaints are received. August falls in the quarter ending September 30, so the report is due October 15. The 30-day period applies to event reports under paragraph (a), the monthly measure does not exist in the rule, and the report is not due a second month after quarter-end.FINRA Rule 4530(d)

When FINRA suspends the registration of an associated person under Rule 8310, for what period may the suspension be imposed?

• a.Only an indefinite period that ends when the person passes a new qualification examination
• b.A definite period, or a period contingent on the performance of a particular act✓
• c.Only a period that the member firm sets, subject to FINRA's later approval of the term
• d.Only a definite period, which may not exceed one year without review by the SEC

Rule 8310(a)(3) allows FINRA to suspend a membership or registration for a definite period or for a period contingent on the performance of a particular act. The rule sets no one-year cap or SEC review step, and it does not limit suspensions to those that end on an examination. FINRA imposes the sanction itself after the Rule 9000 Series process; the member firm does not set its term.FINRA Rule 8310(a)(3)

On Monday, October 5, 2026, a registered representative learns of facts that require an amendment to her Form U4, none involving a statutory disqualification. By what date must the amendment be filed?

• a.Friday, December 4, 2026, which is 60 days after learning the facts
• b.Tuesday, October 6, 2026, which is the next business day after she found out
• c.Wednesday, November 4, 2026, which is 30 days after learning the facts✓
• d.Thursday, October 15, 2026, which is 10 days after learning the facts

Article V, Section 2(c) of the FINRA By-Laws requires an application for registration to be kept current by amendments filed not later than 30 days after learning of the facts or circumstances giving rise to the amendment. Thirty days from October 5 is November 4. The 10-day period is reserved for amendments involving a statutory disqualification, and the rule has neither a next-day nor a 60-day standard.FINRA By-Laws, Article V, Section 2(c)

On Monday, October 5, 2026, a representative's circumstances change so that he becomes subject to a statutory disqualification. By what date must his Form U4 be amended?

• a.Wednesday, November 4, 2026, which is 30 days after it occurs
• b.Monday, October 12, 2026, which is one week after the event
• c.Friday, December 4, 2026, which is 60 days after it occurs
• d.Thursday, October 15, 2026, which is 10 days after it occurs✓

Article V, Section 2(c) sets 30 days for ordinary Form U4 amendments but says an amendment involving a statutory disqualification must be filed not later than ten days after the disqualification occurs. Ten days from October 5 is October 15. Thirty days is the general period, and neither the 7-day nor the 60-day figure appears in the rule.FINRA By-Laws, Article V, Section 2(c)

A person passes the SIE, and a member that hired her wants her to begin recommending mutual funds right away. She has not taken the Series 6. May the member register her as an Investment Company and Variable Contracts Products Representative?

• a.No, because she must first complete a year of supervised work at the member
• b.No, because the SIE alone does not qualify her; she must also pass the Series 6✓
• c.Yes, because the SIE is the only examination required to register as a representative
• d.Yes, for 120 calendar days while she prepares for the Series 6 as a temporary registrant

Supplementary Material .03 to Rule 1210 requires a person to pass the SIE and an appropriate representative qualification examination before registration as a representative can become effective, and it states that passing the SIE alone does not qualify an individual for registration. The SIE is therefore not the only examination needed. The 120-day allowance in Supplementary Material .04 lets an experienced registered representative function as a principal; it is not a temporary registration for someone who has not passed the representative exam. The rule sets no year of supervised work before registration.FINRA Rule 1210, Supplementary Material .03

A member wants a representative with 14 months of experience as a registered representative in the past five years to act as a principal for 120 calendar days before he passes the principal exam. May it do so?

• a.Yes, because 12 months of experience in the past five years is all the rule requires
• b.No, because the representative needs at least 18 months of such experience in the five-year period✓
• c.No, because a representative may not act as a principal at all until the principal exam is passed
• d.Yes, because any registered representative may act as a principal for 120 days before passing the exam

Supplementary Material .04 to Rule 1210 permits a member to designate a registered representative to function as a principal for 120 calendar days before passing the principal exam, but only if the person has at least 18 months of experience as a registered representative within the five-year period before the designation and has met the prerequisite registration, fee and examination requirements. Fourteen months falls short. The 12-month figure does not appear in the rule, and the 120-day allowance does exist.FINRA Rule 1210, Supplementary Material .04

A person first registers as a representative with FINRA on September 15, 2026. By what date must she complete her first Regulatory Element?

• a.March 15, 2027, six months after the date she registered
• b.September 15, 2027, the first anniversary of her registration
• c.December 31, 2026, the end of the year in which she registered
• d.December 31, 2027, the end of the next calendar year✓

Under Rule 1240(a)(1), a person registering for the first time on or after January 1, 2023 completes the Regulatory Element by December 31 of the calendar year after the year of registration, and then annually by December 31. Registration in 2026 therefore makes the first deadline December 31, 2027. The rule is tied to calendar year-end rather than the registration anniversary or a six-month mark, and it does not require completion in the year of registration.FINRA Rule 1240(a)(1)

A representative misses the Regulatory Element deadline and her registration is deemed inactive. What may she still do while inactive?

• a.Receive trail commissions on transactions completed before the inactive status, unless her firm prohibits them✓
• b.Accept unsolicited customer orders, provided she does not solicit any new business from clients
• c.Solicit only investment company products, but only until she completes the Regulatory Element
• d.Service existing customers and earn commissions on any orders they place through her office

Rule 1240(a)(2) says an inactive person must cease all activities as a registered person, may not accept or solicit business and may not receive compensation for the purchase or sale of securities. The one exception is trail or residual commissions from transactions completed before the inactive status, unless the firm has a policy against them. Taking even unsolicited orders is still accepting business, and limited solicitation is not allowed.FINRA Rule 1240(a)(2)

A representative's registration has been inactive for two consecutive years because he never completed the Regulatory Element. What follows?

• a.The registration stays inactive indefinitely and returns to active as soon as he completes the Regulatory Element
• b.The registration is terminated, and he may reregister after a 12-month wait without retaking any examination
• c.FINRA administratively terminates it, and he can reactivate only by reapplying and meeting qualification requirements✓
• d.FINRA terminates the registration, but he keeps his qualification for five years under Rule 1240(c)

Rule 1240(a)(2) provides that a registration inactive for two consecutive years is administratively terminated, and the person may reactivate it only by reapplying and meeting the qualification requirements of Rules 1210 and 1220, which means re-examination unless a waiver applies. Completing the Regulatory Element no longer revives it. The five-year qualification program in Rule 1240(c) is unavailable to someone with a two-year deficiency, and the rule contains no 12-month waiting period.FINRA Rule 1240(a)(2)

A representative who held a registration category for four years terminates it. Under Rule 1240(c), how long may she maintain her qualification, and by when must she elect the program?

• a.Two years, electing only on the Form U5 filed at termination, not afterward
• b.Three years, electing within one year after the termination of registration
• c.Five years, electing within 30 days after the termination of registration
• d.Five years, electing on the Form U5 or within two years of termination✓

Rule 1240(c) lets a person who was registered in a category for at least one year before termination maintain qualification for five years after termination. The election is made at the time of the Form U5 submission or later, within two years of termination, and annual continuing education must be completed by December 31. The other options misstate the length of the period or the election window.FINRA Rule 1240(c)

A representative's employment with a member ends on Tuesday, October 13, 2026. By what date must the member file the Form U5, and what must it also do?

• a.Tuesday, October 27, 2026, giving the representative a copy when it files
• b.Friday, November 27, 2026, giving the representative a copy when it files
• c.Thursday, November 12, 2026, giving the representative a copy when it files✓
• d.Thursday, November 12, 2026, giving the representative a copy only if he asks for one

Article V, Section 3(a) of the By-Laws requires a member to give notice of termination not later than 30 days after the termination and concurrently to give the terminated person a copy of the notice as filed. Thirty days from October 13 is November 12. The copy is not optional or on request, and 14-day and 45-day deadlines do not appear in the rule.FINRA By-Laws, Article V, Section 3(a)

A representative's registration is terminated effective September 1, 2026, and she does not associate with another member. For how long can FINRA file a complaint over conduct that began before the termination?

• a.Five years after the effective date of the termination
• b.Six years after the conduct occurred, as in the arbitration limit
• c.Two years from the date the termination became effective✓
• d.One year after the Form U5 is filed with FINRA by the member

Article V, Section 4(a) of the By-Laws keeps a terminated person subject to a FINRA complaint about conduct that began before termination, provided the complaint is filed within two years after the effective date of the termination. An amendment to the termination notice that discloses possible violations can restart the two-year period. The five-year period belongs to the Rule 1240(c) program, and the six-year limit governs arbitration eligibility, not disciplinary jurisdiction.FINRA By-Laws, Article V, Section 4(a)

A dealer shows a 1,000-share bid, is hit for 600 shares, and immediately after that trade communicates a revised bid size of 400 shares. A second broker then tries to sell 1,000 shares at the bid. How many must the dealer buy?

• a.Only 400 shares, because it communicated the revised size right after completing the transaction✓
• b.Only 600 shares, the size of the trade it just completed against the quotation
• c.None, because a dealer that has just traded owes no further obligation on its bid
• d.All 1,000 shares, because a firm quotation stays firm for its full original size until the dealer withdraws it

Rule 5220 bars an offer at a stated price unless the member will trade at that price on the stated conditions. Supplementary Material .01 expects a dealer making a firm market to buy or sell at least a normal unit of trading (a round lot) at its quote unless marked otherwise, but if the dealer is in the process of effecting a transaction and immediately after completing it communicates a revised quotation size, it is not obligated beyond that revised size. Here the size is 400. The dealer cannot decline altogether, since the revised quotation is still firm, and it is not bound to the original 1,000 or limited to the 600 just traded.FINRA Rule 5220, Supplementary Material .01

Before publishing a quotation for a security, what must a member have under Rule 5210?

• a.Reasonable cause to believe the quotation is bona fide, is not fictitious and is not meant to deceive or manipulate✓
• b.A written commitment from a customer to trade at the quoted price in at least a normal unit of trading in that security
• c.A position in the security large enough to fill at least one normal unit of trading at the price
• d.Approval of the quotation by FINRA market regulation staff before it is circulated to other firms

Rule 5210 and its Supplementary Material .01 prohibit publishing or circulating a quotation unless the member has reasonable cause to believe it is a bona fide quotation, not fictitious and not published for a fraudulent, deceptive or manipulative purpose. The rule does not require a customer commitment, a minimum inventory position or advance FINRA approval; firmness of the quote is the separate subject of Rule 5220.FINRA Rule 5210, Supplementary Material .01

A small corporation opens a brokerage account through its treasurer. Besides the entity's name, what must the member maintain under Rule 4512 about who may act on the account?

• a.The Social Security numbers of each shareholder who owns more than 10% of the corporation
• b.The names of any persons authorized to transact business on behalf of the corporation✓
• c.Only the name of the officer who signed the application, since that officer binds the corporation
• d.The names of all directors of the corporation, whether or not they may transact business

Rule 4512(a)(1)(E) requires, when the customer is a corporation, partnership or other legal entity, the names of any persons authorized to transact business on behalf of the entity. Recording only the signer would omit other authorized persons. Shareholder Social Security numbers are not part of the account record, since the tax identification information in paragraph (a)(2) concerns the customer itself. Directors matter only if they are authorized to act on the account.FINRA Rule 4512(a)(1)(E)

A member opens a discretionary account and names two associated persons to exercise discretion in it. Beyond the usual account information and Rule 3260, what must the member maintain under Rule 4512?

• a.A record of the dated signature of each associated person authorized to exercise discretion✓
• b.The customer's signed consent to each individual discretionary trade, kept with the order ticket
• c.A copy of each authorized associated person's Form U4 filed with the account record
• d.The dated signature of the member's chief compliance officer approving each quarterly review

Rule 4512(a)(3) requires, for discretionary accounts, a record of the dated signature of each named associated person authorized to exercise discretion in the account, in addition to the other account information and Rule 3260. The customer gives authority once in the prior written authorization under Rule 3260(b), not trade by trade, and a Form U4 copy or a compliance officer's signature does not meet the requirement. The signature record is not required for a customer's time-and-price discretion over a definite amount of a specified security.FINRA Rule 4512(a)(3)

A firm's principal reviews discretionary accounts once a year and approves discretionary orders in a monthly batch. What does Rule 3260(c) require instead?

• a.Written approval of each discretionary order by the customer within one business day after execution
• b.A quarterly review of the account, with approval of individual orders needed only after a complaint
• c.Prompt written approval of each discretionary order and review of accounts at frequent intervals✓
• d.Written approval only of orders above the account's average trade size, with a yearly review otherwise

Rule 3260(c) requires the member or its designated person to approve each discretionary order promptly in writing and to review all discretionary accounts at frequent intervals to detect excessive transactions. A monthly batch is not prompt and a yearly review is not frequent. The customer's own approval is not what the rule calls for, and there is no size cutoff or complaint trigger.FINRA Rule 3260(c)

In March 2026 a member updates the home address on a retail customer's account, which remains open. How long must the member preserve the record of the prior address under Rule 4512?

• a.Only until the new address is entered, because superseded data need not be kept
• b.At least six years after the account closes, the period that applies to the current address
• c.At least six years after the date the address was updated, even while the account stays open✓
• d.At least three years after the update, the period for order memoranda under Rule 17a-4(b)

Supplementary Material .01 to Rule 4512 requires a member to preserve a record of customer account information that is later updated for at least six years after the date of the update. Only the last update, or the original information if it was never changed, is kept for six years after the account closes, so that period fits the current address rather than the superseded one. Three years is the order-memoranda period under Rule 17a-4(b), a different record. Superseded information is not discarded when the new entry is made.FINRA Rule 4512, Supplementary Material .01

A unit investment trust prospectus lists a deferred sales charge and, separately, a creation and development fee. The creation and development fee compensates the sponsor for:

• a.Running a secondary market for units after the offering, charged each time units are resold
• b.Forming the trust and building its portfolio, collected when the offering period closes✓
• c.Selecting and replacing securities over the trust's life, deducted from annual income
• d.Holding the trust's securities and mailing distributions, charged to unitholders every year

The creation and development fee reimburses the sponsor for creating the trust and developing the product, and it is paid once, at the close of the initial offering period. A secondary market is maintained voluntarily by the sponsor and is not funded by this fee. A UIT is not actively managed, so no fee pays for ongoing security selection. Safekeeping and distribution costs belong to the trustee's separate fee.

A fixed-term UIT is terminating. In a taxable account, a holder rolls the proceeds into the sponsor's next series at a reduced sales charge. For federal income tax purposes, the rollover is generally:

• a.A tax-deferred rollover that is recognized only when the new units are eventually sold
• b.A nontaxable reinvestment, because the proceeds never reach the holder's bank account
• c.A tax-free exchange of like-kind investments under Section 1035, with the old basis carried over
• d.A taxable disposition of the old units, with gain or loss recognized for that tax year✓

Termination pays out the old units, so the holder has sold them and recognizes gain or loss even though the cash is immediately reinvested; the reduced sales charge affects cost, not taxation. Section 1035 covers insurance and annuity exchanges, not UIT units. Tax deferral exists only inside a retirement account, not in a taxable account. Where the cash goes does not change the recognition of the sale.Internal Revenue Code Section 1001

After the offering, one stock in an equity UIT falls 45% on an earnings warning, though the issuer has neither defaulted nor gone bankrupt. What generally happens to that position?

• a.The sponsor leaves it in place, since the portfolio is fixed and changes only in narrow disclosed cases✓
• b.The trust's portfolio manager sells it and buys a stronger stock in the same sector of the market
• c.Unitholders vote on its removal at the trust's next annual shareholder meeting
• d.The trustee sells it automatically once it loses 25% of its value after the deposit date

A UIT portfolio is not managed: securities are sold only in limited circumstances described in the prospectus, such as a default, and a price decline alone does not qualify. A UIT has no portfolio manager, since the sponsor selects the securities up front. The trustee has no automatic loss trigger. A UIT has no board and holds no regular shareholder meetings, so there is no vote to remove a holding.Investment Company Act of 1940 Section 4(2)

Who selects the securities for a new unit investment trust and deposits them with the trustee in exchange for units?

• a.The board of directors, which reviews each security before the trust is offered to the public
• b.The sponsor, also called the depositor, which typically maintains a secondary market✓
• c.The investment adviser, which chooses securities under a management contract with the trust
• d.The trustee, which picks the securities and also holds them for the unitholders' benefit

The sponsor (depositor) builds the portfolio, deposits it with the trustee for units, and typically repurchases units in a secondary market. The trustee is a bank that holds the securities and pays out income but does not choose investments. A UIT has no investment adviser managing it and, by definition, has no board of directors.Investment Company Act of 1940 Section 4(2)

A unit investment trust holds insured municipal bonds. What does the bond insurance cover?

• a.The market value of the units, so redemptions occur at no less than the purchase price
• b.The purchase price if the sponsor stops maintaining a secondary market for the units
• c.Only the principal due at maturity, with interest payments left uninsured during the trust's life
• d.Timely payment of the bonds' interest and principal, but not the market value of the units themselves✓

Municipal bond insurance guarantees that scheduled interest and principal will be paid if the issuer fails to pay; it does not protect against price declines caused by interest rate changes, so unit values still fluctuate. It is not a guarantee of the unit price or of a market for the units. Insured interest payments are covered along with principal, not principal alone.

A holder of a municipal bond UIT receives monthly distributions funded by the trust's interest income. How is that income generally treated for federal income tax purposes?

• a.It is exempt only for unitholders who live in the state where the bonds were issued
• b.It is taxed as a qualified dividend at long-term rates, as with a corporate stock fund
• c.It is taxed as ordinary income, because a trust rather than the municipal issuer pays it
• d.It keeps its tax-exempt character, so it is generally free of federal income tax✓

A UIT passes income through to unitholders, and interest from municipal bonds retains its federal tax-exempt character. The trust is a conduit, so the payer does not change the character. The federal exclusion does not depend on where the unitholder lives, although state tax treatment may differ. The income is interest, not a qualified dividend. Gains on sales of the units or of trust bonds remain taxable.Internal Revenue Code Section 103(a): interest on state and local bonds

An investor buys 5,000 UIT units at a $10.00 public offering price. The maximum sales fee is made up of a 1.00% initial charge, a deferred sales charge of $0.175 per unit collected later, and a creation and development fee of $0.05 per unit paid from trust assets at the close of the offering period. How much of the sales fee is collected after the purchase date?

• a.$500, the 1.00% initial charge, which is paid at the time of purchase
• b.$875, the deferred charge alone, without the creation and development fee
• c.$1,125, the deferred charge plus the creation and development fee✓
• d.$1,625, the initial charge added to the deferred charge and creation fee

The deferred charge is 5,000 x $0.175 = $875, and the creation and development fee is 5,000 x $0.05 = $250, so $1,125 comes out after purchase. The 1.00% initial charge is 5,000 x $0.10 = $500 and is paid at purchase, which is why $500 is not the later amount. The deferred charge alone, $875, omits the creation fee, and $1,625 adds the initial charge.

A customer asks whether a fixed-income UIT will return $10.00 per unit at its termination date. Which response is accurate?

• a.Yes, if the units were bought during the initial offering period at the public offering price
• b.Yes, because the trustee is required to hold every bond until it matures
• c.No, because the proceeds depend on the value of the remaining bonds, above or below $10.00✓
• d.No, because a UIT returns only its income and never any principal at termination

A UIT has a termination date, but nothing guarantees a return of the unit price. Bonds sold or maturing near termination are worth whatever the market or issuers pay, so proceeds can fall short of or exceed the original price. The trustee has no obligation to hold to maturity, and buying in the initial offering carries no guarantee. A UIT does distribute principal as bonds mature or are sold, so principal is returned in part.

A fund's total 12b-1 charge is 1.00% of average net assets. Which split between an asset-based sales charge and a service fee fits the limits of FINRA Rule 2341?

• a.1.00% asset-based sales charge and no service fee
• b.0.85% asset-based sales charge and a 0.15% service fee
• c.0.50% asset-based sales charge and a 0.50% service fee
• d.0.75% asset-based sales charge and 0.25% service fee✓

Rule 2341 caps the asset-based sales charge at 0.75% of average annual net assets and the service fee at 0.25%, so a full 1.00% charge must be split exactly that way. A 0.85% sales charge exceeds the 0.75% cap. A 0.50% service fee exceeds the 0.25% cap. A 1.00% asset-based sales charge also exceeds the 0.75% cap.FINRA Rule 2341(d)

A customer buys $20,000 of Class C shares. Eight months later the shares are worth $21,000 and the customer redeems all of them. The Class C contingent deferred sales charge is 1.00% in the first year, applied to the lower of original cost or current value. What is the charge?

• a.$133, which is 1.00% of cost prorated for eight of twelve months
• b.$200, which is 1.00% of the $20,000 original cost✓
• c.$210, which is 1.00% of the $21,000 current value
• d.$10, which is 1.00% of the $1,000 gain only

A CDSC is applied to the lower of the shares' original cost or their value at redemption. Cost ($20,000) is lower than value ($21,000), so the charge is 1.00% x $20,000 = $200. Using current value overstates it, and the charge is not prorated by month within the year. It is not limited to the gain either.FINRA Rule 2341(d)

A small employer will offer a fund in its 401(k) plan through a plan recordkeeper. Which share class is built for employer retirement plans and typically pays for distribution and servicing through a 12b-1 fee instead of a sales charge?

• a.Class B, a back-end load class that converts to Class A over time
• b.Class R, a class designed for employer-sponsored retirement plans✓
• c.Class T, a front-end load class sold through intermediaries
• d.Class I, an institutional class with a very high minimum

Class R shares are designed for employer-sponsored retirement plans and generally have no front-end load or CDSC, with an ongoing 12b-1 fee paying for distribution and plan servicing. Class I shares are institutional and normally carry no 12b-1 fee. Class T charges a front-end load. Class B imposes a declining back-end charge and is generally closed to new investors.

A foundation plans to invest $5 million in one fund family and wants the class that usually carries neither a sales charge nor a 12b-1 fee. Which class is it generally eligible for?

• a.Class C, because its 1.00% 12b-1 fee is waived on large accounts
• b.Class T, because it has a front-end load but no ongoing fee
• c.Class A, because large purchases get a load waiver and a 12b-1 waiver
• d.Class I, institutional shares with a high minimum investment✓

Institutional (Class I) shares usually have no sales charge and no 12b-1 fee, but require a high minimum that a $5 million foundation can meet. Class A at that size generally waives the front-end load yet still bears a 12b-1 fee, typically 0.25%. Class C keeps its 12b-1 fee regardless of account size. Class T carries a front-end load and a 0.25% 12b-1 fee.

A representative describes Class T shares to a client. Which description fits the class?

• a.A maximum 2.50% front-end load and a 0.25% annual 12b-1 fee, with no CDSC✓
• b.A maximum 5.75% front-end load and a 0.25% annual 12b-1 fee, with no CDSC
• c.No front-end load, a 1.00% annual 12b-1 fee and a CDSC that declines over six years
• d.No front-end load, a 1.00% annual 12b-1 fee and a 1% CDSC in the first year

Class T shares are sold through intermediaries with a maximum front-end load of 2.50%, a 12b-1 fee of up to 0.25% and no CDSC. A 5.75% maximum load describes a traditional Class A. A one-year 1% CDSC with a 1.00% 12b-1 fee describes Class C. A declining multi-year CDSC with a 1.00% 12b-1 fee describes Class B.

Two weeks after redeeming Class A shares, a customer puts the proceeds back into the same fund family and pays no new front-end sales charge. Which privilege applies?

• a.The combination privilege, which aggregates purchases of different funds to reach a breakpoint
• b.Rights of reinvestment, which let a redeemer buy back within a stated window at NAV✓
• c.A letter of intent, which sets a reduced sales charge for purchases over thirteen months
• d.The exchange privilege, which moves money between two funds in one family at NAV

A reinstatement (rights of reinvestment) privilege lets a shareholder who redeemed shares buy back into the fund within the period stated in the prospectus without paying a new load. An exchange moves money between funds without a redemption and repurchase decision and does not restore a sale. A letter of intent covers future purchases, and the combination privilege adds up purchases across funds; neither addresses reinvesting redemption proceeds.

A client sends a representative $1.5 million for a single fund. The representative places all of it in Class C shares, which pay the firm more over time, even though Class A would carry no front-end load at that size. The main problem is that the representative:

• a.Sold a share class the fund is barred from offering to individual investors
• b.Put the firm's compensation ahead of the client's interest in choosing a share class✓
• c.Exceeded the 8.5% maximum sales charge that FINRA Rule 2341 allows on a single purchase order
• d.Failed to obtain a signed letter of intent from the client before accepting the order

Choosing the costlier of two available share classes for the firm's benefit breaches the care and conflict obligations of Regulation Best Interest. Class C has no front-end charge, so the 8.5% cap is not at issue. A letter of intent is unnecessary for one purchase already above the breakpoint. Class C shares may be offered to individuals; the problem is the recommendation, not the class.Regulation Best Interest, 17 CFR 240.15l-1

A fund charges 5.0% on purchases under $100,000, 4.0% from $100,000 to $249,999, and 3.0% from $250,000 to $499,999, each as a percentage of the offering price. A customer signs a $250,000 letter of intent and makes a first deposit of $60,000 when the NAV is $20.00. Ignoring fractions, how many shares does that deposit buy?

• a.2,850 shares, using the 5.0% rate for a purchase under $100,000
• b.2,880 shares, using the 4.0% rate for a $100,000 purchase
• c.2,910 shares, using the 3.0% rate from the letter of intent✓
• d.3,000 shares, which assumes no sales charge

The letter of intent earns the 3.0% rate on every purchase, including the first deposit. Offering price = $20.00 / (1 - 0.03) = $20.6186, and $60,000 / $20.6186 = 2,910 shares (equivalently $60,000 x 0.97 / $20). The 5.0% and 4.0% rates apply to purchases made without the letter, and ignoring the charge would give 3,000 shares.

Ignoring investment growth, an investor compares $10,000 in Class A shares (3.75% front-end load, 0.25% annual 12b-1 fee) with $10,000 in Class C shares (no load, 1.00% annual 12b-1 fee). Applying each percentage to the $10,000, after how many years are the cumulative costs equal?

• a.4 years, from comparing the load only with Class C's full annual fee
• b.15 years, from dividing the load by Class A's annual fee
• c.5 years, when Class A's load and fees equal Class C's fees✓
• d.3 years, from adding the two annual fees together

Class A costs $375 up front plus $25 a year; Class C costs $100 a year. The cumulative costs match when $375 + $25t = $100t, so t = 5 years. Four years comes from comparing the load only with Class C's full $100 and forgetting Class A's own 12b-1 fee. Three years adds the two annual fees together, and 15 years divides the load by Class A's fee alone.

At the close, a fund holds securities worth $48,000,000, cash of $2,000,000 and $500,000 of dividends and interest receivable. It owes $300,000 in accrued expenses and $200,000 for securities it bought but has not paid for. With 2,500,000 shares outstanding, what is its NAV per share?

• a.$19.80, from leaving out the dividends and interest receivable
• b.$20.00, which is net assets of $50,000,000 over 2,500,000 shares✓
• c.$19.00, from counting only the securities less liabilities
• d.$20.20, from total assets before subtracting any liabilities

NAV = (total assets - liabilities) / shares. Assets are $48,000,000 + $2,000,000 + $500,000 = $50,500,000, and liabilities are $300,000 + $200,000 = $500,000, leaving $50,000,000; divided by 2,500,000 shares gives $20.00. Ignoring the liabilities gives $20.20. Dropping the receivable gives $19.80. Counting only securities gives $19.00.Investment Company Act of 1940 Rule 22c-1

During the year a fund earned $9,000,000 of dividends and $3,000,000 of interest, and paid $4,000,000 of operating expenses. It has 20,000,000 shares outstanding. What is its net investment income per share?

• a.$0.25, which leaves out the interest earned
• b.$0.40, which is $8,000,000 of net investment income over the shares✓
• c.$0.45, which counts the dividends earned, with no expenses subtracted
• d.$0.60, which is total income with no expenses subtracted

Net investment income is investment income minus expenses: ($9,000,000 + $3,000,000) - $4,000,000 = $8,000,000, or $0.40 on 20,000,000 shares. Gross income of $12,000,000 gives $0.60 before expenses. Dividends alone give $0.45, and dividends less expenses give $0.25, so each leaves out part of the correct calculation.

A mutual fund holds a thinly traded foreign security that has no reliable market quotation at the close. Under the SEC's fair value rule, who is responsible for determining its fair value in good faith?

• a.The fund's custodian bank, which values every security it holds on the board's behalf each day
• b.The principal underwriter, because it sets the public offering price at the close
• c.The fund's independent auditor, which assigns values when market quotes are not available
• d.The fund's board, which may designate the adviser as valuation designee under the board's oversight✓

Rule 2a-5 makes the board responsible for fair value when market quotations are not readily available; it may assign the task to the adviser as valuation designee and must oversee it. A custodian safeguards assets and does not set values. The principal underwriter sells shares at a price built from NAV. The auditor reviews valuation in the annual audit but does not price the portfolio.Investment Company Act of 1940 Rule 2a-5

Which of the following describes the late trading that Rule 22c-1 forward pricing is meant to prevent?

• a.Buying fund shares at that day's NAV after the 4:00 p.m. close, using news that came after the close✓
• b.Charging a customer the next business day's NAV for an order the customer entered at 4:30 p.m.
• c.Pricing an order entered on a Saturday at the closing NAV of the following Monday session
• d.Crediting dividends reinvested on the payable date at the NAV next computed that day

Forward pricing requires orders to receive the next NAV computed after the fund receives them. Late trading lets someone place or confirm an order after the cutoff and still get that day's already-known price, capturing post-close news. Pricing a 4:30 p.m. order at the next day's NAV and a Saturday order at Monday's NAV is correct forward pricing. Reinvesting dividends at the next computed NAV is normal.Investment Company Act of 1940 Rule 22c-1

A fund averages $400 million in net assets. It charges a 0.55% management fee and a 0.25% 12b-1 fee, and incurred $600,000 in other operating expenses. What is its expense ratio?

• a.1.40%, which treats the $600,000 as 0.60%
• b.0.95%, which is the sum of the management, 12b-1 and other expense ratios✓
• c.0.80%, which leaves out the other operating expenses
• d.0.70%, which leaves out the 12b-1 fee

Other expenses are $600,000 / $400,000,000 = 0.15%. The expense ratio adds the components: 0.55% + 0.25% + 0.15% = 0.95%. Omitting other expenses gives 0.80%, omitting the 12b-1 fee gives 0.70%, and misreading $600,000 as 0.60% gives 1.40%.

A fund share began the year at a $25.00 NAV. During the year it paid $0.50 per share of income and $1.00 of capital gains, and the year-end NAV was $26.50. Ignoring reinvestment and taxes, what was the total return?

• a.8.0%, which adds only the income dividend
• b.10.0%, which adds only the capital gain
• c.6.0%, which counts only the change in NAV
• d.12.0%, which counts the NAV change plus all distributions✓

Total return counts the change in NAV plus all distributions: ($26.50 - $25.00) + $0.50 + $1.00 = $3.00, and $3.00 / $25.00 = 12.0%. The NAV change alone gives 6.0%. Adding only the $0.50 dividend gives 8.0%, and adding only the $1.00 capital gain gives 10.0%.