FINRA Series 6 — All Questions

For what purpose does an ABLE account provide tax-advantaged saving?

• a.Retirement income for any adult, with distributions taxed at ordinary rates and no disability requirement
• b.College tuition and fees only, with no other qualified uses
• c.Qualified disability expenses of a beneficiary who became disabled before a specified age, with interests treated as municipal fund securities✓
• d.Disability expenses of a beneficiary who became disabled at any age, with contributions deductible on the federal return

ABLE accounts let eligible individuals whose disability began before the statutory onset age (age 46 for onset on or after January 1, 2026, previously 26) save for qualified disability expenses without losing means-tested benefits; like 529 plans their interests are municipal fund securities under MSRB oversight (Internal Revenue Code Section 529A). They are not general retirement or college-only accounts, there is an onset-age limit, and contributions are not deductible.Internal Revenue Code Section 529A (26 U.S.C. 529A)

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

• a.The commission the product pays relative to alternatives
• b.The separate account's performance over the past 12 months and the subaccounts' rankings against their peer group reported quarterly
• c.The customer's age, financial situation, tax status, objectives, time horizon, liquidity needs, and risk tolerance✓
• d.The customer's credit score alone

Suitability and best-interest obligations require evaluating the customer's full investment profile before recommending a product (FINRA Rules). Compensation to the representative is a conflict to manage, not a basis for a recommendation.

A 70-year-old must draw income from a $50,000 lump sum within a year and has no other liquid savings. Which recommendation is least suitable?

• a.A deferred variable annuity with a seven-year surrender-charge schedule✓
• b.A short-term investment-grade bond fund with an average maturity under two years
• c.A laddered portfolio of Treasury bills that mature within the next twelve months
• d.A money market fund investing in Treasury and agency securities

Locking the customer's only liquid money into a contract with a seven-year surrender-charge schedule conflicts with a one-year liquidity need and would likely trigger surrender charges. A money market fund, Treasury bills maturing within the year and a short-term bond fund all keep the money accessible and stable enough for a one-year income need (FINRA Rules).

A 30-year-old contributing monthly to a Roth IRA wants maximum long-term growth and plans no withdrawals for 30 years. The most appropriate recommendation is:

• a.A short-term Treasury fund
• b.A single-state municipal bond fund
• c.A money market fund
• d.A diversified equity growth fund✓

A 30-year horizon and a growth objective favor equities, whose higher expected return offsets interim volatility (FINRA Rules). Municipal bonds waste their tax exemption inside a Roth, and cash-like funds risk lagging inflation.

A customer wants to hold six months of living expenses where the money is safe and quickly available. The best match is:

• a.A money market fund✓
• b.A high-yield corporate bond fund
• c.A long-term government bond fund
• d.An aggressive growth fund

Money market funds emphasize preservation of principal and next-day liquidity, fitting an emergency reserve (FINRA Rules). High-yield carries credit risk, growth funds market risk, and long-term bonds significant interest rate risk.

Why is a municipal bond fund generally inappropriate inside a Traditional IRA?

• a.The tax-exempt interest advantage is wasted because IRA earnings are already tax-deferred✓
• b.Municipal bonds are prohibited investments in an IRA
• c.Municipal interest is subject to the alternative minimum tax when held inside an IRA
• d.Holding municipal bonds in an IRA would cause the account to lose its tax-deferred status under IRS rules

Municipal interest is federally tax-exempt, but an IRA already shelters earnings, and distributions are taxed as ordinary income, so the investor pays for a benefit already provided and forgoes the higher taxable yield available elsewhere (Internal Revenue Code). Municipal bonds are not prohibited in an IRA, they do not disqualify the account, and the alternative minimum tax is not the reason.

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

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

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

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

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

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

A 62-year-old opened a Roth IRA with a contribution three years ago and now takes a distribution of earnings. How is it taxed?

• a.Tax-free, but subject to a 10% additional tax because of the account's age
• b.Taxed as long-term capital gains, because the account has been open three years
• c.Taxed as ordinary income, because the five-year period has not been met✓
• d.Tax-free, because the owner is older than age 59 1/2 at the time of withdrawal

A Roth distribution is a qualified, tax-free distribution only if the five-year period has been met and the owner is 59 1/2 or older (or disabled, deceased, or buying a first home up to $10,000). The five-year clock starts on January 1 of the first contribution year, so three years is not enough and the earnings are taxable. The 10% additional tax does not apply at 62.IRC Section 408A; Roth IRA

A 45-year-old with a Roth IRA that holds $20,000 of contributions and $5,000 of earnings withdraws $12,000. How is the withdrawal treated?

• a.All $12,000 is taxable, because earnings are withdrawn first
• b.$7,000 is taxable, because the earnings are taxed at a ratio
• c.Tax-free, but a 10% penalty applies on the whole amount
• d.Tax-free and penalty-free, because contributions come out first✓

For a nonqualified Roth distribution, contributions are treated as coming out first, then conversions, then earnings. The $12,000 is less than the $20,000 of contributions, so it is neither taxed nor penalized. Pro rata treatment applies to traditional IRAs with basis, not Roth IRAs.IRS Publication 590-B; Roth ordering rules

An investor contributes more than the annual IRA limit and leaves the excess in the account. What is the tax on the excess?

• a.No tax, because the excess is simply carried to the next year
• b.A 25% additional tax, charged once at the time of the excess
• c.A 10% additional tax, charged once at the time of the excess
• d.A 6% excise tax for each year that the excess remains in the IRA✓

Excess IRA contributions are subject to a 6% excise tax for every year they remain, though the tax can be avoided by withdrawing the excess and its earnings by the tax filing deadline, including extensions. The 10% and 25% figures belong to other IRA penalties.IRC Section 4973; excess IRA contributions

What is the deadline for making an IRA contribution for the prior tax year?

• a.June 30 of the following year, six months after the end of the tax year
• b.December 31 of that tax year, the end of the calendar year in question
• c.The tax filing due date for that year, including any filed extension
• d.The tax filing due date for that year, not counting extensions✓

Contributions for a tax year may be made until the original due date of the return, usually April 15 of the following year. An extension of time to file does not extend the contribution deadline.IRS Publication 590-A; IRA contributions

A married couple files a joint return. One spouse has no earned income. Can that spouse contribute to a traditional IRA?

• a.Yes, but only to a Roth IRA, never to a traditional IRA for that spouse
• b.Yes, if the working spouse's earned income covers both contributions✓
• c.Yes, but only if the couple files separate returns, never a joint return
• d.No, because only a person who has earned income can fund an IRA

Under the spousal IRA rule, a couple filing jointly can contribute for a nonworking spouse as long as the couple's combined earned income is at least the total contributed. Each spouse still has a separate IRA. Filing separately removes the benefit.IRS Publication 590-A; spousal IRA

An investor takes an indirect rollover distribution from one IRA and completes it within 60 days. How often may this be done?

• a.Without limit, as long as each amount is redeposited within the 60-day period
• b.Once in any 12-month period, counted across all of the investor's IRAs✓
• c.Once each calendar year per type of IRA, with Roth and traditional kept apart
• d.Once per IRA in any 12-month period, so several IRAs allow several rollovers

An owner may make only one indirect (60-day) IRA-to-IRA rollover in a 12-month period, aggregated across all IRAs. Direct trustee-to-trustee transfers have no limit.IRC Section 408(d)(3); IRA rollovers

A participant receives a $50,000 eligible rollover distribution from a 401(k) in a check made payable to the participant. How much is withheld for federal income tax?

• a.24% mandatory withholding, or $12,000
• b.No withholding, since it may be rolled over
• c.10% mandatory withholding, or $5,000
• d.20% mandatory withholding, or $10,000✓

Eligible rollover distributions paid to the participant are subject to mandatory 20% federal withholding. A direct rollover to an IRA avoids it. The participant would need to replace the $10,000 from other funds to roll over the full $50,000 within 60 days.IRC Section 3405; qualified plan distributions

A non-spouse who is not disabled or chronically ill inherits an IRA in 2026 from a parent who died before the required beginning date. The IRA must generally be fully distributed by:

• a.the end of the tenth year following the year of death✓
• b.the end of the fifth year following the year of death
• c.the end of the year of the beneficiary's 73rd birthday
• d.the end of the year following the year of death

Under the SECURE Act, most non-spouse designated beneficiaries must empty an inherited IRA by the end of the tenth year after death. A spouse, a minor child of the decedent, a disabled or chronically ill person, or someone not more than 10 years younger may stretch payouts.IRC Section 401(a)(9); inherited IRAs

An IRA owner misses a required minimum distribution but takes it and files a corrected return in the correction window. The excise tax is generally:

• a.6% of the amount not distributed
• b.50% of the amount not distributed
• c.25% of the amount not distributed
• d.10% of the amount not distributed✓

Under SECURE 2.0, the penalty for missing a required minimum distribution is 25% of the shortfall, reduced to 10% if the owner corrects it within the correction window. The old penalty was 50%. 6% is the excess contribution tax.IRC Section 4974; required minimum distributions

A 74-year-old IRA owner has the IRA trustee send $5,000 directly to a qualifying charity. What is the tax treatment?

• a.Taxable income, with a 10% additional tax charged on the amount sent to charity
• b.Excluded from income, but it does not count toward the required minimum distribution
• c.Taxable income, though the owner may take a charitable deduction for the full amount
• d.Excluded from income, and it counts toward the required minimum distribution✓

A qualified charitable distribution made directly from an IRA by an owner age 70 1/2 or older is excluded from gross income and may satisfy the required minimum distribution. Because it is excluded, it is not also deducted.IRC Section 408(d)(8); qualified charitable distributions

A participant has a vested 401(k) balance of $60,000 and no earlier loans. What is the most the plan can lend?

• a.$30,000, which is 50% of the vested balance✓
• b.$60,000, which is 100% of the vested balance
• c.$50,000, which is the dollar cap by itself
• d.$20,000, which is a third of the vested balance

A plan loan is limited to the lesser of 50% of the vested balance or $50,000, so the limit is $30,000. The $50,000 cap applies only when 50% of the balance would be higher.IRC Section 72(p); retirement plan loans

A 56-year-old leaves her employer and takes a distribution from her 401(k). When is the 10% early distribution tax waived?

• a.When she is at least age 55 and takes withdrawals from an IRA
• b.When she separated from service in or after the year she turned 55✓
• c.When she separated from service in or after the year she turned 50
• d.When the distribution is rolled into an IRA and then withdrawn

The separation-from-service rule (often called the rule of 55) removes the 10% additional tax for distributions from the plan of the employer she left in or after the year she turns 55. It does not apply to IRAs, including IRAs funded by a rollover.IRC Section 72(t)(2)(A)(v); separation from service

An employee defers 6% of pay into a 401(k) and receives a matching contribution under a six-year graded vesting schedule. After two years of service, the employee leaves. Which portion is fully vested?

• a.The employer match, which is vested after two years in all plans
• b.The employee's own deferrals, which are always 100% vested✓
• c.Neither amount, because both follow the vesting schedule
• d.Both amounts, because 401(k) plans use immediate vesting

An employee's elective deferrals and their earnings are always fully vested. The employer match may vest over time under a schedule, and an employee who leaves early may forfeit the unvested part.Retirement plan vesting

An employee takes a distribution from a SIMPLE IRA 18 months after first participating, at age 40. The additional tax on the early distribution is:

• a.10% of the amount distributed
• b.6% of the amount distributed
• c.25% of the amount distributed✓
• d.15% of the amount distributed

For SIMPLE IRAs, the additional tax is 25% instead of 10% if the distribution takes place within two years of first participation. After two years, the usual 10% applies.IRC Section 72(t)(6); SIMPLE IRAs

Under SECURE 2.0, a 529 plan beneficiary may roll unused 529 funds into the beneficiary's own Roth IRA, subject to:

• a.a $10,000 lifetime limit and an account open at least 5 years
• b.no lifetime limit, as long as the account is open at least 10 years
• c.a $35,000 lifetime limit and an account open at least 15 years✓
• d.a $35,000 yearly limit and an account open at least 15 years

A 529-to-Roth rollover is limited to $35,000 over the beneficiary's lifetime, requires the 529 account to have been open for 15 years, and counts against the annual Roth IRA contribution limit. Contributions made in the last five years cannot be rolled over.IRC Section 529(c)(3)(E); 529-to-Roth rollovers

A 529 account owner uses plan assets to repay a beneficiary's qualified student loans. The federal limit on this treatment is:

• a.No limit, if the loans financed tuition
• b.$10,000 over the beneficiary's lifetime✓
• c.$35,000 over the beneficiary's lifetime
• d.$10,000 per year, for each year of repayment

A 529 distribution of up to $10,000 over the beneficiary's lifetime may repay the beneficiary's qualified education loans, and a separate $10,000 applies to each sibling. It is not an annual allowance.IRC Section 529(c)(9); student loan repayment

A beneficiary receives a nonqualified 529 distribution of $8,000, of which $2,000 is earnings. The federal tax treatment is:

• a.The $2,000 of earnings is taxed as income and carries a 10% additional tax✓
• b.The $2,000 of earnings is taxed as income with no additional tax
• c.The $8,000 is a return of contributions, so there is no tax at all
• d.The full $8,000 is taxed as income and carries a 10% additional tax

Only the earnings portion of a nonqualified 529 distribution is taxed, and the 10% additional tax applies to that portion. The contributions come back without tax. The 10% tax is waived in some cases, such as when the beneficiary receives a tax-free scholarship.IRC Section 529(c)(6); nonqualified distributions

A 17-year-old receives $6,000 of unearned income from a custodial UTMA account. Above a threshold, the income is taxed:

• a.at the parents' marginal rate, under the kiddie tax✓
• b.at the child's own rate, however large the income is
• c.at a flat 15% rate, regardless of the parents' income
• d.at the custodian's rate, as the custodian runs the account

Unearned income above the annual threshold is taxed at the parents' marginal rate for children under 19, and for full-time students under 24. The custodian is not the taxpayer.IRC Section 1(g); kiddie tax

A new customer opens a taxable account and does not provide a taxpayer identification number. The firm must apply backup withholding to dividends at:

• a.24%, the backup withholding rate✓
• b.30%, the nonresident alien rate
• c.10%, the default IRA withholding rate
• d.20%, the retirement plan rollover rate

If a customer fails to give a TIN (or the IRS says it is incorrect), the payer must withhold 24% from dividends and other reportable payments. The 30% rate is for nonresident aliens (Form W-8BEN), and 20% is the retirement plan rollover rate.IRC Section 3406; backup withholding

A nonresident alien who files a Form W-8BEN with no treaty benefit receives a U.S. stock dividend. The default withholding rate is:

• a.24% of the dividend, the backup withholding rate
• b.30% of the dividend, before any treaty relief✓
• c.0%, because the dividend is paid to a foreign person
• d.15% of the dividend, the qualified dividend tax rate

Dividends paid to a foreign person are withheld at 30%, unless a treaty provides a lower rate. The 24% backup rate does not apply to a properly documented foreign holder.IRC Sections 1441 and 1442

A parent opens a UTMA account for a child and later wants to take the securities back for the parent's own use. What is the rule?

• a.The parent can with a court order, since the minor is not yet an adult
• b.The parent cannot, because the gift is irrevocable and belongs to the minor✓
• c.The parent can after one year, since gifts may be reversed then
• d.The parent can at any time, because the parent is the custodian

A gift to a UTMA or UGMA account is irrevocable, and the assets belong to the minor. The custodian can use them only for the minor's benefit. At the age set by state law, the child takes control.UTMA/UGMA custodial accounts

A customer's account holder dies and the executor asks to sell the securities. Which documents does the firm need to open an estate account?

• a.A death certificate and the written consent of every heir
• b.A death certificate and letters testamentary from the probate court✓
• c.The signed will alone, even if it was witnessed and notarized
• d.A power of attorney signed by the account holder before death

The firm needs proof of death and court papers naming the executor, called letters testamentary when there is a will, or letters of administration when there is none. A power of attorney ends at the principal's death.Estate accounts

A customer says to a representative, 'Buy 500 shares of ABC today, and use your judgment on the timing.' Absent a written extension signed by the customer, the authority is:

• a.time-and-price discretion only, ending at the close of that business day✓
• b.full discretion, which a principal must approve order by order, in writing
• c.full discretion, which continues until the customer revokes it in writing
• d.time-and-price discretion, lasting a full week unless the customer extends it

Rule 3260 lets a representative choose the time or price of an order the customer has specified without a discretionary authorization, but only until the end of that business day, unless the customer gives a signed and dated written extension. Full discretion needs prior written authority and principal approval.FINRA Rule 3260

A customer's IRA names her sister as beneficiary, but her will leaves everything to her son. At her death, who receives the IRA?

• a.The sister, because the beneficiary form overrides the will✓
• b.The estate, which then distributes it under the will
• c.The son and sister equally, since the documents conflict
• d.The son, because a will controls every asset she owned

Assets with a named beneficiary, such as IRAs, annuities, and life insurance, pass by contract and not through the will. A will cannot override a valid beneficiary form.Beneficiary designations

A 50-year-old municipal employee leaves the job and takes a lump sum from a governmental 457(b) plan. Is the 10% early distribution tax due?

• a.Yes, as for any plan withdrawal before age 59 1/2
• b.No, but the distribution is taxed as ordinary income✓
• c.No, and the distribution is also free of income tax
• d.Yes, unless the employee rolls it over to a Roth

Governmental 457(b) distributions after separation from service are not subject to the 10% additional tax, though they are taxable as ordinary income. This sets them apart from 401(k) and 403(b) plans, where the tax applies.IRC Section 457(b); governmental plans

A representative recommends a variable annuity with annual charges well above those of a comparable contract from another insurer. Both offer the same features, and the customer's goals fit either. Which Reg BI obligation is most directly at issue?

• a.No obligation, since a commission always serves the customer
• b.The compliance obligation, which concerns only the firm's procedures
• c.The care obligation, which looks at cost and available alternatives✓
• d.The disclosure obligation, which is met once the fees are in the prospectus

The care obligation requires the representative to understand the product's costs and consider reasonably available alternatives, and an identical contract at a higher cost is hard to defend. Disclosure alone does not satisfy the care obligation. The compliance obligation is about firm procedures, not individual recommendations. Commission-based recommendations are not presumed to be in the customer's best interest.SEC Regulation Best Interest

A 78-year-old retiree with modest savings and no other liquid assets wants to put 80% of them in a variable annuity with an eight-year surrender schedule. What is the central concern?

• a.Surrender period conflicts with liquidity needs✓
• b.Subaccount fees are lower than those of mutual funds
• c.Variable annuities cannot be sold to customers over age 65
• d.Surrender charges disappear once the owner reaches 59½

A long surrender schedule locks up money she may need for health costs and daily living, so the product and the amount do not fit her horizon. No law bars annuity sales to seniors. Surrender charges are contract terms and do not end at 59½, which relates only to the tax penalty. Subaccount and contract fees are typically higher than those of an ordinary mutual fund.

A customer age 45 with an IRA proposes buying a variable annuity inside it, mainly to get tax deferral. What should the representative point out?

• a.The annuity makes withdrawals before 59½ penalty-free
• b.An IRA already defers tax, so deferral adds nothing✓
• c.Tax deferral inside the annuity doubles the IRA's deferral benefit
• d.Annuity purchases inside an IRA are prohibited by the Code

An IRA already shelters earnings, so the annuity adds cost without more deferral; only its guarantees or income features could justify it. Deferral does not stack. Annuities are permitted inside IRAs. The 10% additional tax before 59½ still applies to the IRA's distributions, whatever the underlying investment.

A client says he can tolerate large losses, but he must pay for his daughter's tuition in two years. Which factor should govern the recommendation?

• a.His short time horizon, which limits risk capacity✓
• b.The potential return, since tuition costs rise every year
• c.His age, since younger investors always take more risk
• d.His stated risk tolerance, since willingness is the only factor

Willingness and ability to take risk are separate, and a near-term obligation reduces ability, so the horizon should limit the risk level. Treating tolerance as the only factor ignores the cash need. Age is not the issue here. Chasing return to keep up with tuition inflation would expose the very money needed in two years.

A client already owns $35,000 of a fund family's Class A shares and invests another $20,000 in the same family. The first breakpoint is $50,000. How is the new purchase priced?

• a.At the reduced charge, but only after a 13-month letter of intent
• b.At the reduced charge, because the $35,000 already held counts✓
• c.At the full sales charge, because $20,000 is below the breakpoint
• d.At NAV with no charge, because the client is a repeat buyer

Rights of accumulation add the existing holdings to the new purchase, giving $55,000, which clears the $50,000 breakpoint. Ignoring the existing shares gives the full charge. Repeat buyers do not get NAV pricing. A letter of intent covers future purchases, but rights of accumulation apply without one.

A representative recommends that a client sell Fund A and buy Fund B, a similar fund in a different family that charges a new front-end load. There is no difference in objective or performance. What is the problem?

• a.The representative did not first obtain a letter of intent
• b.It triggers a new sales charge with no clear client benefit✓
• c.The switch violates the client's rights of accumulation
• d.Mutual fund switches between fund families are prohibited

Recommending a switch that costs the client a fresh load with no offsetting benefit fails the care standard, and it is the type of fund switching regulators target. Rights of accumulation are not violated by a switch. Different families are allowed. A letter of intent is a voluntary pricing tool, not a requirement for a switch.

A married couple filing jointly with a modified adjusted gross income of $230,000 asks to contribute directly to a Coverdell education savings account. What should the representative say?

• a.They can contribute the full amount, since the limit covers only single filers
• b.Their income is above the phase-out, but a 529 has no income limit✓
• c.They can contribute only half of the usual limit
• d.They can contribute directly if they use a custodian

Coverdell contributions phase out between $190,000 and $220,000 of modified AGI for joint filers, so $230,000 bars direct contributions, while 529 plans impose no income limit. The limits apply to joint filers as well. A custodian does not change the income test. The phase-out is complete above $220,000, so no partial contribution remains.IRC Section 530

A client with $500,000 to invest for retirement 20 years away is offered Class C shares of a fund. Why might Class A shares be more appropriate?

• a.Class C carries a higher front-end load than Class A
• b.Class A has breakpoint discounts and lower annual fees✓
• c.Class C shares must be converted to Class A after one year
• d.Class A has no 12b-1 fee and no sales charge

For a large, long-held purchase, breakpoint discounts and lower annual fees make Class A cheaper overall than the level 12b-1 fees that compound in Class C. Class C does not carry a front-end load; its charge is typically a small back-end charge for a short period plus the ongoing level fee. Conversion of Class C to Class A, where offered, takes years rather than one. Class A does carry a front-end load, though it shrinks at breakpoints, and it may carry a 12b-1 fee as well.

A customer's trusted contact calls and instructs the representative to sell the customer's fund shares and send the proceeds to the contact. What should the representative do?

• a.Execute it if the contact can supply the account number
• b.Execute it if the contact promises written authorization later
• c.Execute the trade, since the customer named the contact
• d.Decline; a trusted contact has no trading authority✓

A trusted contact exists so the firm can reach someone about the customer's wellbeing or to address suspected exploitation. That person has no trading or withdrawal authority. Naming the contact is not a power of attorney. Possessing the account number proves nothing, and a promise of later paperwork cannot authorize action now.FINRA Rule 4512

A customer says, "Buy 500 shares of that ETF whenever you think the price is right, any day this week." There is no written discretionary agreement. What is the issue?

• a.Timing discretion lasts only the day it is granted✓
• b.A verbal instruction is enough for any length of time
• c.Discretion of any kind is allowed only for mutual funds
• d.Timing discretion has no time limit once given orally

Authority over only the time or price of a transaction the customer has chosen is valid for the day it is given unless written discretionary authority is on file. A week exceeds that. Without a time limit, the authority would be full discretion. The permission is not confined to mutual funds, and verbal authority does not last indefinitely.

A customer owns a variable annuity with a $200,000 guaranteed minimum death benefit, though the account value is $120,000. A representative suggests a Section 1035 exchange into a new contract. What is a key concern?

• a.The guaranteed death benefit carries over automatically
• b.The new guarantee would likely reset near $120,000, losing $80,000✓
• c.The new contract is not allowed to offer a death benefit
• d.The exchange would trigger tax on all gains in the old contract

A guarantee is a feature of the old contract, and the new contract typically sets its guarantee at the transferred value, here about $120,000, so the $80,000 difference is lost. A proper exchange is tax-free. Benefits do not transfer automatically. Most new contracts do offer a death benefit, just not the old one.IRC Section 1035

A representative promotes a variable annuity that credits a 5% bonus on each premium. Which point must be explained to the customer?

• a.The bonus is exempt from income tax when withdrawn
• b.The bonus is a guaranteed return that the insurer can never take back
• c.The bonus removes the surrender charge on that premium
• d.Higher charges or a longer surrender period may offset the bonus✓

Bonus credits are usually paid for through higher expenses or longer surrender periods, and insurers may recapture them if the owner withdraws early or dies within a set time. The credit is not a guaranteed, permanent return. It is taxed like other annuity earnings when withdrawn. A bonus does not remove surrender charges.

A 35-year-old with two young children and a mortgage asks about variable life insurance. What should the representative establish before recommending it?

• a.Whether permanent coverage with investment risk fits his needs✓
• b.Only whether the customer holds a securities license
• c.Only the balances in the customer's current accounts
• d.Nothing, since life insurance is exempt from suitability review

A variable life recommendation needs a basis in the customer's need for coverage, ability to keep paying premiums, and interest in cash-value investment risk. Licensing of the customer is irrelevant. Life products are subject to the same review as other recommended securities. Account balances alone say nothing about insurance needs.

A 55-year-old investor with a moderate risk profile places 90% of her portfolio in a single sector fund. Which concern applies?

• a.Liquidity risk, since sector funds cannot be redeemed
• b.Concentration risk, since the portfolio is not diversified✓
• c.No concern, since sector funds are diversified across all industries
• d.Inflation risk alone, since nothing else is involved

A sector fund is diversified within one industry but not across industries, and 90% in one sector is far from a moderate profile. Sector funds are not diversified across all industries. Inflation risk is not the main concern. Open-end sector funds are redeemable at NAV.

A customer wants brokerage assets to pass to a niece at death without going through probate. Which registration fits best?

• a.A partnership account in both their names
• b.A tenants in common account with her
• c.An individual account plus a will naming her
• d.Transfer on death registration✓

A transfer on death registration names a beneficiary who receives the assets directly at the owner's death, outside probate. A will does not avoid probate, because the estate must administer the assets first. Tenants in common leaves the deceased owner's share to the estate rather than the survivor. A partnership account is for a business and does not create a nonprobate transfer.

A grandfather opens a UTMA account for his grandson and funds it, then asks to withdraw the money for his own use two years later. What is the answer?

• a.He cannot, since the gift to the minor is irrevocable✓
• b.He can, since the donor keeps ownership of the account
• c.He can, after paying a 10% early withdrawal penalty
• d.He can, if the custodian agrees to the request

A UTMA contribution is an irrevocable gift, and the assets belong to the minor even though a custodian manages them. The donor does not keep ownership. A custodian's consent cannot unwind a completed gift. A 10% penalty exists for certain retirement plan distributions, not for custodial accounts.

A representative tells a prospect that a variable annuity's subaccounts will "earn a guaranteed 7% a year." What is wrong with this statement?

• a.Subaccount returns carry market risk and cannot be promised✓
• b.Seven percent exceeds the legal maximum for annuity returns
• c.Nothing, as long as the prospect signs the application
• d.The claim is fine if the insurer carries a high rating

Subaccounts carry market risk, and promising a return is a misrepresentation; only features like a death benefit are guaranteed by the insurer. A signature does not cure a false statement. No law caps annuity returns. The rating of the insurer matters for its guarantees but does not make subaccount returns certain.