FINRA Series 6 — All Questions

A stock has a beta of 1.4. If the overall market rises 10%, the stock is expected to:

• a.rise about 7%
• b.rise about 1.4%
• c.rise about 11.4%
• d.rise about 14%✓

Beta measures sensitivity to market movements. A beta of 1.4 implies the stock moves 1.4 times as much as the market, so a 10% market rise suggests a 14% gain. The other results come from dividing by 1.4 or adding 1.4 to 10.Beta

Fund B returned 10% with a standard deviation of 8%, and the risk-free rate is 2%. Fund B's Sharpe ratio is:

• a.1.00, found by dividing the 8% excess return by the 8% deviation✓
• b.0.80, found by dividing the 8% excess return by the 10% total return
• c.1.25, found by dividing the 10% return by 8, ignoring the risk-free rate
• d.4.00, found by dividing the 8% excess return by the 2% risk-free rate

The Sharpe ratio is (return - risk-free rate) / standard deviation = (10 - 2) / 8 = 1.00. It measures excess return per unit of total risk. Leaving out the risk-free rate, dividing by the return, or dividing by the risk-free rate does not match that definition.Risk-adjusted return

A bond fund has an effective duration of 6 years. If interest rates rise by 1 percentage point, the fund's price is expected to:

• a.fall about 60%
• b.fall by about 6%✓
• c.rise by about 6%
• d.fall by about 1%

Duration estimates the percentage price change for each 1% change in rates: 6 years x 1% = about 6%, and the direction is opposite to rates, so prices fall. A 1% change is not the same as a 1% price change.Bond duration

A 6% bond with a $1,000 par value is priced at $950. The current yield is closest to:

• a.6.00%, found by using the coupon rate
• b.5.70%, found by dividing $57 by $1,000
• c.6.84%, found by dividing $65 by $950
• d.6.32%, found by dividing the $60 by $950✓

Current yield = annual interest / current market price = $60 / $950 = 6.32%. The coupon rate, 6%, is based on par value and is unchanged when price falls.Current yield

A bond is purchased at a discount. Which ordering of its yields is correct, from lowest to highest?

• a.Nominal yield, yield to maturity, current yield
• b.Nominal yield, current yield, yield to maturity✓
• c.Current yield, nominal yield, then YTM
• d.Yield to maturity, current yield, nominal yield

For a discount bond, the coupon (nominal) yield is the lowest, current yield is higher because it is measured against a price below par, and yield to maturity is the highest because it also includes the gain to par.Yield relationships

An inverted yield curve means that:

• a.short-term yields are above long-term yields along the curve✓
• b.yields rise at first and then fall off after about ten years
• c.yields are about equal at every maturity along the curve
• d.long-term yields are higher than short-term yields on the curve

An inverted yield curve slopes downward, with short-term rates above long-term rates, and is often viewed as a signal of a weakening economy. A normal curve has long-term rates above short-term rates, and a flat curve has equal rates.Yield curve

Which of these is a leading economic indicator?

• a.The bank prime rate
• b.The unemployment rate
• c.The inflation rate
• d.New building permits✓

Building permits and stock prices tend to change before the economy turns, so they are leading indicators. Unemployment, the consumer price index, and the prime rate follow the economy, which makes them lagging indicators.Economic indicators

An investor holds a TIPS in a taxable account. When the principal rises with inflation, how is the increase taxed?

• a.As income in the year of the increase, though it is paid only at maturity✓
• b.As a capital gain, once the TIPS is sold or matures at the adjusted principal
• c.As income only in the year the TIPS matures and the adjustment is received
• d.As nothing, because the adjustment only reflects inflation and is federally exempt

The inflation adjustment to a TIPS principal is taxable as interest in the year it occurs, although the investor receives it only at maturity or sale. This is phantom income, which is why TIPS are often held in tax-deferred accounts.Treasury inflation-protected securities

During a year, a fund bought $36 million of securities and sold $30 million of securities. Its average net assets were $100 million. The portfolio turnover rate is:

• a.66%, found by dividing the $66 million of total trades by $100 million
• b.36%, found by dividing the $36 million of purchases by $100 million
• c.6%, found by dividing the $6 million difference by $100 million
• d.30%, found by dividing the $30 million of sales by $100 million✓

Portfolio turnover is the lesser of purchases or sales divided by average net assets: $30 million / $100 million = 30%. Using the larger number or adding the two overstates it.Fund portfolio turnover

An investor sells a stock in a taxable account at a loss, and two weeks later buys the same stock in the investor's IRA. What is the tax treatment?

• a.The loss is disallowed, and the IRA's basis rises by the loss
• b.The loss is disallowed, and the IRA's basis is not increased✓
• c.The loss is deferred, and may be used when the IRA stock is sold
• d.The loss is allowed, because an IRA is a separate account

Under Rev. Rul. 2008-5, a purchase of substantially identical securities in the investor's IRA within the wash sale period disallows the loss, and unlike a purchase in a taxable account, the disallowed loss is not added to the IRA's basis, so the loss is permanently lost.IRC Section 1091; wash sales in IRAs

An investor sells a fund at a loss, and 10 days later the investor's spouse buys the same fund in the spouse's own account. The loss is:

• a.allowed, because the purchase was made in a different account name
• b.disallowed, but only if the couple files a joint tax return
• c.allowed, if the spouse files a separate tax return from the investor
• d.disallowed, because the spouse's purchase triggers the wash sale rule✓

The wash sale rule applies when the taxpayer's spouse (or a controlled company) buys substantially identical securities within 30 days before or after the sale. The 30-day window runs on both sides of the sale.IRC Section 1091; wash sales

An investor buys fund shares, receives a $2 per share long-term capital gain distribution, and sells the shares at a loss three months later. How is the loss treated up to the amount of that distribution?

• a.As an ordinary loss, because the fund distributed the gain
• b.As a nondeductible loss, because it falls under the wash sale rule
• c.As a long-term capital loss, despite the short holding period✓
• d.As a short-term capital loss, because of the short holding period

If fund shares held for six months or less are sold at a loss, the loss is treated as long-term to the extent of long-term capital gain distributions received on them. This prevents the investor from turning a long-term gain into a short-term loss.IRC Section 852(b)(4); short-term mutual fund losses

A fund's NAV is $20.00 just before the ex-date. It pays a $1.00 per share capital gains distribution. An investor buys 1,000 shares the day before the ex-date. Which statement is accurate?

• a.The investor owes no tax, because the NAV falls by the same amount as the payment
• b.The investor's cost basis falls by $1,000 when the distribution is paid to the investor
• c.The investor owes tax only if the distribution is paid in cash rather than reinvested
• d.The investor owes tax on the $1,000, though the NAV drops to about $19.00✓

A distribution reduces the NAV by the amount paid, but the investor who bought before the ex-date is still taxed on the distribution, whether it is taken in cash or reinvested. This is why buying shortly before a distribution is a poor idea in a taxable account.Distributions and NAV

A customer inherits stock that the decedent bought for $10,000 and that was worth $60,000 on the date of death. If the customer sells it for $64,000 four months later, the gain is:

• a.$54,000 and short-term, because the heir held it four months
• b.$4,000 and short-term, because the heir held it four months
• c.$4,000 and long-term, because the basis is stepped up✓
• d.$54,000 and long-term, because the decedent held it long enough

Inherited securities take a basis equal to fair market value on the date of death, so the gain is $64,000 - $60,000 = $4,000. Inherited property is automatically treated as long-term, whatever the heir's actual holding period.Inherited securities

A 58-year-old owner of a variable annuity dies during the accumulation phase. Premiums paid were $100,000, no withdrawals were taken, and the account value has fallen to $90,000. The contract carries a standard return-of-premium death benefit. What does the named beneficiary receive?

• a.$0
• b.$90,000
• c.$110,000
• d.$100,000✓

A return-of-premium death benefit pays the greater of account value or premiums paid less withdrawals, so the beneficiary receives $100,000. Paying only $90,000 would ignore the guarantee. No age-based step-up is built into a return-of-premium benefit, and the contract does not simply end at death during accumulation; the death benefit is the reason the guarantee exists.

A variable annuity offers a guaranteed lifetime income rider. Which resource ultimately stands behind that guarantee?

• a.FDIC deposit insurance covering the contract value
• b.The separate account's subaccount portfolios and their returns
• c.The insurer's general account and its claims-paying ability✓
• d.SIPC coverage that protects the contract against market declines

Contractual guarantees such as income riders and death benefits are obligations of the insurer's general account, so they are only as strong as the insurer. Subaccount assets sit in the separate account, are held for owners and carry market risk, so they do not back a guarantee. FDIC insurance applies to bank deposits, not annuities. SIPC protects against a failed broker-dealer, never against investment loss.

A variable life policy has a $250,000 death benefit. The insured dies with a $30,000 policy loan outstanding and $2,000 of unpaid loan interest. What does the beneficiary receive?

• a.$250,000
• b.$282,000
• c.$218,000✓
• d.$220,000

Loans and accrued interest are deducted from the death benefit: $250,000 minus $30,000 minus $2,000 is $218,000. Paying the full face would let the loan vanish. Leaving out the interest gives $220,000, but the insurer subtracts every dollar owed. Adding the loan to the face amount reverses the arithmetic, since a loan is money already advanced to the owner.

A variable life insurance owner dies while a policy loan is outstanding. How is the death benefit paid?

• a.The loan is forgiven and the full face is paid
• b.The beneficiary must first repay the loan balance
• c.The policy lapses and nothing at all is paid out
• d.The death benefit is reduced by the loan✓

An outstanding policy loan, plus any accrued interest, is subtracted from the proceeds, so the beneficiary receives the death benefit net of the loan. Loans are not forgiven at death. The insurer deducts the balance itself, so the beneficiary does not repay it beforehand. Death ends the contract by claim, and a loan at death does not cause a lapse that cancels the benefit.Variable life insurance contract terms

After two years of poor subaccount performance, a variable universal life owner who pays only the minimum premium receives a lapse warning. What is the most likely cause?

• a.Cash value is too low to cover the monthly cost of insurance and charges✓
• b.The owner repaid a policy loan ahead of schedule
• c.The insurer's separate account became insolvent
• d.The policy has failed the seven-pay test and must be terminated

A universal-type policy lapses when cash value cannot cover monthly insurance and expense charges, and losses plus minimal premiums drain it. Failing the seven-pay test makes a policy a modified endowment contract but does not end coverage. Separate account assets are segregated from insurer creditors. Repaying a loan raises cash value, so it could never trigger a lapse.

A unit investment trust holds a portfolio of municipal bonds. One bond matures. What generally happens to the proceeds?

• a.The board of directors votes on how to reinvest them
• b.The portfolio manager buys a replacement bond to hold maturity constant
• c.The sponsor reinvests them in additional units
• d.Distributed to unit holders, not reinvested✓

A UIT holds a fixed portfolio with no active management, so maturing or called bonds are not replaced; principal is distributed to unit holders. A UIT has no portfolio manager who rebalances and no board of directors, so no one is voting on reinvestment. A sponsor cannot unilaterally buy more units with holders' money, since the trust is fixed at the outset.

A unit holder in a UIT wants to cash out two years before the trust terminates. Which statement is correct?

• a.They cannot be sold before the termination date
• b.They can be redeemed with the trustee at NAV✓
• c.They can be sold only to another unit holder at a negotiated price
• d.They can be sold only on a national securities exchange

UIT units are redeemable, and sponsors usually maintain a secondary market at a price based on net asset value. They do not trade on exchanges like closed-end fund shares. Early exit is allowed, though the proceeds depend on the NAV of the underlying securities. The buyer is the trustee or sponsor, not a negotiated deal between unit holders.

A closed-end fund has a NAV of $12.00 per share and trades at $10.80 on an exchange. At what discount is it trading?

• a.12.0%
• b.10.0%✓
• c.1.2%
• d.11.1%

The discount is measured against NAV: ($12.00 minus $10.80) divided by $12.00 is 10.0%. Dividing the $1.20 gap by the $10.80 market price gives 11.1%, which uses the wrong base. Quoting the dollar difference as a percentage mixes units. The 12.0% figure has no basis in the premium and discount formula.

An open-end fund has total assets of $52 million, liabilities of $2 million and 2.5 million shares outstanding. What is its NAV per share?

• a.$19.20
• b.$20.00✓
• c.$21.60
• d.$20.80

NAV equals assets minus liabilities, divided by shares: ($52 million minus $2 million) divided by 2.5 million is $20.00. Skipping liabilities gives $20.80. Subtracting the $2 million twice gives $19.20, and adding it gives $21.60. Each of these errors treats what the fund owes incorrectly.

A mutual fund has a NAV of $19.00 and a 5% sales charge stated as a percentage of the public offering price. What is the public offering price?

• a.$18.05
• b.$19.95
• c.$20.00✓
• d.$19.00

The charge is 5% of the offering price, so NAV is 95% of it: $19.00 divided by 0.95 is $20.00, and the $1.00 difference is the sales charge. Multiplying NAV by 1.05 takes 5% of the wrong base. Subtracting 5% moves the price the wrong direction. Load funds sell at the offering price, not NAV.

Which share class typically carries a back-end sales charge that declines the longer shares are held and then converts to a lower-cost class?

• a.Class I, offered mainly to institutional investors
• b.No-load shares, which have no sales charge at all
• c.Class A, which charges a front-end load at purchase
• d.Class B, which converts to Class A in later years✓

Class B shares charge a contingent deferred sales charge that steps down each year, and they typically convert to Class A after several years. Class A charges its load up front at purchase. Institutional Class I shares generally carry no sales charge and no conversion feature. No-load shares have no sales charge to decline at all.

A mutual fund wants to describe itself as no-load. What is the highest 12b-1 fee it may charge and still use that label?

• a.1.00% of average net assets per year
• b.Zero, because any 12b-1 fee bars the label
• c.0.75% of average net assets per year
• d.0.25% of average net assets per year✓

Under FINRA Rule 2341 a fund may call itself no-load only if its 12b-1 fees, which here would be only the service-fee component, stay at 0.25% of average net assets or less. The 0.75% figure is the cap on the asset-based sales charge alone, and 1.00% is the combined cap, so both are too high for the label. A small service fee is permitted, so zero is not required.FINRA Rule 2341(d)

An investor places an order to buy 100 shares of an equity ETF during the trading day. How is the order executed?

• a.Through the transfer agent at the day's closing NAV
• b.Directly from the fund at the NAV computed after the close
• c.On an exchange, at the prevailing market price✓
• d.From an authorized participant, who must sell a full creation unit

ETF shares trade on exchanges throughout the day at market prices, like stocks, with the counterparty being another investor or a market maker. Only authorized participants deal with the fund directly, and only in creation units. NAV-at-close pricing and transfer-agent execution describe how mutual fund shares are bought, which is the structural difference between the two.

An ETF's shares trade at a persistent premium to the value of its underlying holdings. How does the creation process tend to correct this?

• a.Authorized participants create new shares and sell them, lowering the price✓
• b.The fund's board lowers the NAV so it matches the market price
• c.Retail investors redeem directly with the fund at the premium price
• d.The sponsor suspends trading until the premium disappears

When the market price exceeds the value of the basket, authorized participants profit by delivering the securities, taking newly created ETF shares and selling them. The added supply moves the price back toward NAV. NAV is computed from holdings, so the board does not set it. Retail investors cannot redeem with the fund, and sponsors do not halt trading to fix premiums.

Why do broad-index ETFs typically distribute fewer capital gains than comparable index mutual funds?

• a.Redemptions are mostly in kind, so no holdings must be sold✓
• b.ETFs are exempt from distributing capital gains under Subchapter M
• c.ETFs never change their holdings once they have launched
• d.ETFs hold mostly tax-exempt securities, so no gains are realized

In-kind redemptions let an ETF hand low-basis shares to authorized participants instead of selling them, which limits realized gains. ETFs that are regulated investment companies still must pass through realized gains, so there is no exemption. ETFs hold ordinary taxable securities, and index ETFs do rebalance when the index changes.

An investor holds an exchange-traded note linked to a commodity index. The index rises, but the note falls sharply after its issuing bank's credit rating collapses. Which risk is this?

• a.Prepayment risk on the underlying commodity contracts
• b.Issuer credit risk, since the note is unsecured debt of the bank✓
• c.Tracking error from creation and redemption activity
• d.A closed-end fund discount to net asset value

An ETN is an unsecured debt obligation of its issuer, so its price reflects the issuer's creditworthiness as well as the index. Prepayment risk belongs to mortgage securities. ETNs hold no basket and have no creation-unit mechanism that produces tracking error. A closed-end discount belongs to a fund with a portfolio, and an ETN is not a fund.

A 2x leveraged ETF resets daily. An investor buys it at $100 when its index is flat. The index rises 10% on day one and falls 10% on day two. What is the ETF worth after day two?

• a.$98
• b.$100
• c.$96✓
• d.$99

Day one: $100 times 1.20 is $120. Day two: $120 times 0.80 is $96. The index itself finished at 0.99, down 1%, but daily compounding of leveraged returns produces a 4% loss. Assuming the moves cancel ignores the path. Doubling the 1% index loss ignores compounding, and $99 ignores the leverage.

A REIT reports a tax loss for the year. How does a shareholder treat that loss?

• a.It can offset only the shareholder's capital gains
• b.It passes through only to shareholders owning more than 5%
• c.It stays with the REIT and carries forward against its future income✓
• d.It passes through to offset the shareholder's ordinary income

A REIT is a pass-through for distributions, not for losses, so losses stay at the trust and are carried forward against its future income. Shareholders cannot use them against ordinary income or capital gains. No ownership threshold converts a REIT loss into a deduction, which is why REITs differ from limited partnerships.IRC Section 857(b)

A REIT has taxable income of $40 million for the year. What is the minimum it must distribute to keep its REIT status?

• a.$40 million
• b.$30 million
• c.$20 million
• d.$36 million✓

A REIT must distribute at least 90% of taxable income, which is $36 million here. The 75% figure comes from the REIT asset and income tests, not from the distribution requirement. Distributing 100% is not required, though the entity then pays corporate tax on what it retains. Fifty percent is far below the statutory floor.IRC Section 857(a)

A client is considering a non-traded REIT. Which feature should the representative stress as a key risk?

• a.Shares do not trade on an exchange, and repurchases may be capped✓
• b.Shares must be redeemed within seven days at NAV by law
• c.REITs are barred from owning commercial property
• d.The sponsor guarantees the monthly distributions

Non-traded REIT shares have no secondary market, and the sponsor's repurchase program can be capped or stopped, so investors can be locked in. The seven-day redemption requirement is a feature of open-end funds. Distributions are not guaranteed, and they can be paid partly from offering proceeds. REITs commonly own commercial property, such as offices and apartments.

Without changing the beneficiary, how often may a 529 plan account owner change the investment allocation of existing contributions?

• a.Only when the beneficiary turns 18
• b.Twice per calendar year✓
• c.Without limit, at any time
• d.Once every three years

Federal rules allow a 529 owner to redirect existing balances to different investment options twice per calendar year, and anytime the beneficiary changes. Once every three years is stricter than any rule. Unlimited changes could convert the account into a trading vehicle, which Congress prevented. The beneficiary's age does not gate the change.IRC Section 529(b)(4)

A 529 plan offers an age-based portfolio for a newborn. How will its allocation change over time?

• a.It converts to a fixed annuity at the age of 18
• b.It becomes more conservative as enrollment nears✓
• c.It stays fixed unless the owner reallocates
• d.It becomes more aggressive as enrollment nears

An age-based option follows a glide path, starting equity-heavy and shifting to bonds and cash as the enrollment date approaches, so there is less to lose when tuition bills arrive. A shift toward aggression would add risk exactly when the money is needed. The allocation changes automatically, and the plan holds no annuity conversion.

Which statement about a target-date fund is correct?

• a.Its allocation stays fixed for its entire life
• b.It must liquidate all holdings on the target date
• c.It guarantees full recovery of principal on the target date
• d.It shifts to bonds over time; no guarantee✓

Target-date funds rebalance along a glide path toward lower risk over time, yet nothing in the structure guarantees principal at the target date, and losses are possible even then. A fixed allocation would defeat the glide path. Many funds continue past the target date, with the allocation still adjusting, so liquidation on that date is not required.

A fund shareholder asks about a money market fund. Which statement is accurate?

• a.The Federal Reserve guarantees the $1.00 share price
• b.Shares are insured by the FDIC up to $250,000 per depositor
• c.Shares are uninsured, and the price can fall below $1.00✓
• d.SIPC coverage protects against any decline in share value

Money market funds are investment products that seek, but do not promise, a stable $1.00 share price. FDIC insurance covers bank deposits, not fund shares. SIPC protects against broker-dealer failure, not market loss. No federal agency stands behind the share price, and every prospectus carries a statement to that effect.

A registered index-linked annuity differs from a fixed indexed annuity in which way?

• a.It is a registered security with downside beyond a buffer✓
• b.It credits a fixed rate that is set once a year
• c.It is regulated only by state insurance departments
• d.It guarantees principal against all index losses

A RILA is a registered security, sold with a prospectus and subject to FINRA rules, with downside protection limited to a buffer or floor, so owners can lose money. A fixed indexed annuity typically guarantees principal. State-only regulation describes the fixed indexed annuity. A rate reset once a year describes a fixed annuity, not a RILA.

A variable annuity has a seven-year declining surrender schedule that charges 6% in year two. The account value is $100,000, and the contract allows a free withdrawal of 10% annually. The owner withdraws $20,000 in year two. What is the surrender charge?

• a.$1,200
• b.$2,000
• c.$0
• d.$600✓

The first $10,000 is free, so only the $10,000 excess carries the 6% charge, which is $600. Applying 6% to the whole $20,000 gives $1,200, ignoring the free amount. The withdrawal is double the free amount, so the charge is not zero. The 10% figure is the free-withdrawal allowance, not a surrender rate.

Which of the following is one of the four component obligations of Regulation Best Interest?

• a.The pricing parity obligation
• b.The continuous monitoring obligation
• c.The conflict of interest obligation✓
• d.The best execution obligation

Reg BI rests on the disclosure, care, conflict of interest and compliance obligations. It does not impose a continuing duty to monitor an account unless the firm has agreed to provide monitoring. Best execution is a separate duty that applies to order handling, not to recommendations. Nothing in Reg BI requires uniform pricing across customers.SEC Regulation Best Interest (Rule 15l-1)

When must a broker-dealer deliver Form CRS to a retail investor?

• a.At or before the first recommendation, order or account opening✓
• b.Once a year, together with the annual proxy materials
• c.Only when the investor makes a written request for it
• d.Within 30 days after the new account is opened and funded

Form CRS is delivered at or before the first of the key events: a recommendation of an account type, a securities transaction or a strategy, an order placed, or an account opened. Waiting 30 days would let the sale happen before the relationship summary is seen. Delivery is not request-driven. Annual proxy delivery is unrelated to the relationship summary.SEC Rule 17a-14 (Form CRS)

A representative recommends that a retail customer buy a variable annuity for personal use. Which general conduct standard governs the recommendation?

• a.The ERISA fiduciary standard, because annuity contracts are retirement products
• b.Reg BI, plus the Rule 2330 requirements✓
• c.FINRA Rule 2111 suitability alone, with Rule 2330 as the only additional rule
• d.The Investment Advisers Act fiduciary standard, because the recommendation is personalized advice

Reg BI governs a broker-dealer's recommendation to a retail customer who will use it for personal purposes, and FINRA Rule 2111 does not apply to recommendations that are subject to Reg BI (Supplementary Material .08). Rule 2330 still adds specific requirements for deferred variable annuities, such as obtaining the customer's profile and evaluating exchanges. ERISA applies to employee benefit plans and their fiduciaries, not to a personal-use purchase. The Advisers Act fiduciary standard applies to investment advisers, not to a broker-dealer representative making a recommendation.17 CFR 240.15l-1; FINRA Rule 2330; FINRA Rule 2111 Supplementary Material .08

A representative submits a deferred variable annuity application. Within what time must a registered principal approve or reject it?

• a.Within thirty days after the free look ends
• b.Within three business days of issuance
• c.On the same day, before any premium is taken
• d.Within seven business days of receipt✓

Rule 2330 requires principal review within seven business days of receipt of the complete application at the supervisory office. Three days after issuance would allow the contract to be in force before review. Waiting until the free look ends would defeat the purpose of review. A same-day requirement is stricter than the rule.FINRA Rule 2330(c)

A customer is considering exchanging one deferred variable annuity for another. Which consequence must the representative be able to say the customer has been informed of?

• a.The replacement contract cannot carry mortality and expense charges
• b.A new surrender charge period may start✓
• c.The old insurer must refund all prior surrender charges
• d.The exchange eliminates the customer's tax liability on all future earnings

Rule 2330 requires the principal to find that the customer was informed of the consequences of an exchange, including surrender charges, loss of existing benefits and a new surrender period. An exchange does not wipe out tax on future earnings, because deferral simply continues. Charges already paid are not refunded, and replacement contracts typically do carry mortality and expense charges.FINRA Rule 2330(b)

A customer places a mutual fund purchase order with a representative at 3:55 p.m. Eastern, but the firm's order-entry delay means it is keyed at 4:20 p.m. The firm received the order before the 4:00 p.m. close. Which price applies?

• a.The price at the moment the order was finally keyed into the system
• b.The next business day's NAV, because the order was keyed after 4:00 p.m.
• c.A price negotiated with the fund's principal underwriter
• d.That day's NAV, because the firm received the order before 4:00✓

Forward pricing uses the next NAV computed after the order is received, and receipt before the close means that day's NAV. A keying delay cannot push the customer to a later price. Mutual fund shares are not priced intraday, so there is no keying-time price. Underwriters cannot negotiate individual prices.Investment Company Act of 1940, Rule 22c-1

An open-end fund receives a redemption request on Monday. Under the Investment Company Act, within how many days must it generally pay?

• a.At the fund's discretion, with no statutory limit
• b.Seven days after the shares are tendered✓
• c.Thirty days after the shares are tendered
• d.Fifteen days after the shares are tendered

Section 22(e) prohibits an open-end fund from postponing payment for more than seven days after tender, except in emergencies such as exchange closures. Thirty and fifteen days both exceed the statutory limit. The fund has no free discretion here, which is part of what makes open-end shares redeemable.Investment Company Act of 1940, Section 22(e)

A firm emails a market commentary to 40 retail investors over a 20-day period. How is the communication classified, and what is required before use?

• a.Institutional communication; exempt from principal review
• b.Correspondence; no principal approval is needed before use
• c.Retail communication; a principal must approve it first✓
• d.Internal communication; supervisory review is unnecessary

Written communication distributed to more than 25 retail investors in 30 calendar days is a retail communication, and a qualified principal must approve it before use. Correspondence is limited to 25 or fewer retail investors in that period. An institutional communication goes only to institutional investors, and an internal one never reaches customers.FINRA Rule 2210

A retail communication promoting a specific mutual fund family must be filed with FINRA's Advertising Regulation Department within what period?

• a.Never; fund ads go to the SEC only
• b.Thirty calendar days after first use
• c.Before first use, with prior FINRA approval
• d.Within ten business days of first use✓

Retail communications that promote or recommend a registered investment company or family must be filed within 10 business days of first use. Pre-use filing is a requirement for certain new-firm and specialized communications, not for fund promotions. Thirty days exceeds the rule. Filing with FINRA does not substitute for compliance with SEC advertising rules, as both apply.FINRA Rule 2210(c)(3)

Mutual fund advertising must present standardized average annual total return for which periods?

• a.One, five and ten years, or life of the fund if shorter✓
• b.Three, five and seven years, or life of the fund if shorter
• c.Five, ten and fifteen years, regardless of the fund's age
• d.One, three and five years, or life of the fund if shorter

Rule 482 standardizes returns over 1, 5 and 10 years, or since inception for a fund younger than that, so investors compare like with like. A one-three-five set is not the standard. Three-five-seven and five-ten-fifteen are not in the rule, and a fund younger than the longest period reports life of fund.SEC Rule 482