FINRA Series 6 — All Questions

How is the net asset value (NAV) per share of an open-end investment company calculated?

• a.Total assets minus total liabilities, divided by the number of shares outstanding✓
• b.The market price of the fund's shares at the close of trading on the exchange
• c.Total assets divided by the number of shares outstanding
• d.Total assets minus total liabilities, divided by the number of shareholders of record

NAV per share is the fund's net worth (assets less liabilities) spread over the shares outstanding, computed at least once each business day. Ignoring liabilities overstates value, so the first choice is wrong. Open-end fund shares do not trade on an exchange at a market price, and dividing by shareholders rather than shares produces a meaningless figure.Investment Company Act of 1940

A customer calls at 11:00 a.m. and places an order to buy shares of a mutual fund that prices its portfolio once daily at the close of the market. Which price will the customer receive?

• a.The next NAV computed after the order was received✓
• b.The NAV computed at the close of the previous business day
• c.The NAV in effect at the moment the order was accepted
• d.The average of the previous day's and the current day's NAV

Forward pricing requires that purchase and redemption orders be executed at the next price calculated after the order is received, which here is that day's closing NAV plus any sales charge. Using the prior day's price or an intraday value would let investors trade on stale information. Averaging two days' prices is not a pricing method any fund uses.Investment Company Act of 1940

A mutual fund has a net asset value of $9.30 per share and a sales charge of 7% of the public offering price. What is the public offering price?

• a.$10.00✓
• b.$10.65
• c.$9.95
• d.$10.35

POP equals NAV divided by (100% minus the sales charge percentage), so $9.30 / 0.93 = $10.00. Adding 7% to the NAV gives $9.95, a common error because the sales charge is a percentage of the offering price, not of NAV. The other figures reflect sales charges well above the 7% stated.

A fund's public offering price is $12.50 and its net asset value is $11.50. What is the sales charge percentage?

• a.9.3%
• b.8.7%
• c.7.5%
• d.8.0%✓

The sales charge equals the dollar spread divided by the public offering price: $1.00 / $12.50 = 8%. Dividing the $1.00 by the NAV instead produces 8.7%, which is the classic trap because the sales charge is always stated as a percentage of POP. The remaining figures do not correspond to either calculation.

Under FINRA rules, an open-end fund may impose the maximum permitted sales charge of 8.5% only if it offers which combination of features?

• a.A no-load share class, quarterly dividends, and daily liquidity
• b.Breakpoints, rights of accumulation, and reinvestment of dividends at net asset value✓
• c.A guaranteed minimum return, breakpoints, and monthly statements mailed to shareholders each and every month
• d.Rights of accumulation, a letter of intent, and a contingent deferred sales charge feature at the time of purchase

FINRA conditions the 8.5% maximum on the fund giving investors quantity discounts (breakpoints), rights of accumulation, and the ability to reinvest distributions at NAV; a fund lacking any of these must charge less. No fund may guarantee a return, and offering a no-load class is not a condition of charging a load. A letter of intent and a CDSC are optional features, not the required trio.FINRA Rule 2341 (Investment Company Securities)

A customer wants to invest $24,000 in a fund whose next breakpoint occurs at $25,000. The representative processes the $24,000 order without mentioning the breakpoint. This conduct is best described as:

• a.Breakpoint selling, which is prohibited✓
• b.Switching, which requires principal approval
• c.Acceptable, because breakpoints apply only to purchases above $50,000
• d.Acceptable, because the customer named the dollar amount

Selling shares in an amount just below a breakpoint without disclosing that a slightly larger purchase would reduce the sales charge is breakpoint selling, a prohibited practice that benefits the representative at the customer's expense. The customer naming the amount does not relieve the representative of the duty to disclose. Breakpoint schedules commonly start well below $50,000, and switching refers to moving assets between funds, not to a single new purchase.FINRA Rule 2341 (Investment Company Securities)

Which statement about a letter of intent (LOI) for mutual fund breakpoints is correct?

• a.It is a binding contract requiring the investor to complete the purchases on penalty of forfeiting the discount
• b.It covers 13 months and may be backdated up to 90 days to include a prior purchase✓
• c.It permits the investor to count purchases made in any other fund family toward reaching the breakpoint discount
• d.It covers a period of 24 months and cannot be backdated

An LOI lets an investor obtain a reduced sales charge by pledging to invest a stated amount within 13 months, and it may be backdated as much as 90 days so a recent purchase counts toward the goal. The letter is not binding: if the investor does not complete it, the fund simply liquidates escrowed shares to collect the higher sales charge. Purchases in unrelated fund families do not count toward the LOI.FINRA Rule 2341 (Investment Company Securities)

Rights of accumulation differ from a letter of intent in that rights of accumulation:

• a.Eliminate the sales charge entirely on all future purchases once the first breakpoint has been reached
• b.Apply only to shares purchased with reinvested dividends
• c.Require the investor to commit to future purchases within a stated period to keep the reduced sales charge
• d.Have no time limit and let existing holdings count toward the next breakpoint✓

Rights of accumulation allow the current value or total cost of shares already owned to be added to a new purchase so the combined amount reaches a breakpoint, and there is no deadline for using them. A letter of intent, by contrast, looks forward over 13 months. Rights of accumulation reduce, but do not eliminate, the sales charge and are not limited to reinvested shares.

A 12b-1 fee charged by a mutual fund is used primarily to pay for:

• a.Brokerage commissions incurred when the fund trades securities inside the fund's investment portfolio each year
• b.Distribution and shareholder servicing costs, such as marketing and compensation to selling firms✓
• c.The portfolio manager's advisory fee
• d.Custodial and transfer agent recordkeeping only

Rule 12b-1 under the Investment Company Act of 1940 permits a fund to use fund assets to pay for distribution and shareholder servicing, and the fee is deducted from assets annually rather than charged at the point of sale. The advisory fee, portfolio transaction costs, and custodial fees are separate expense line items disclosed in the prospectus.Investment Company Act of 1940

A fund may describe itself as "no-load" only if its annual 12b-1 charges do not exceed:

• a.There is no limit, because no-load refers only to the absence of a front-end charge
• b.0.75% of average net assets
• c.0.25% of average net assets✓
• d.1.00% of average net assets

FINRA permits the no-load label only when combined asset-based sales and service charges stay at or below 0.25% per year. The 0.75% figure is the cap on the distribution portion alone, and 1.00% is the total ceiling on 12b-1 charges for a fund that does not claim to be no-load. A fund with meaningful ongoing distribution fees is not truly no-load even without a front-end charge.FINRA Rule 2341 (Investment Company Securities)

A 45-year-old investor has $250,000 to invest for retirement in about 20 years and expects to add money over time. Which share class is generally most appropriate?

• a.Class B shares, because the contingent deferred sales charge disappears over time
• b.Class C shares, because the level load spreads the cost evenly across the holding period, keeping the annual cost constant over the entire holding period
• c.Class A shares, because the large purchase qualifies for breakpoints and the ongoing expenses are lowest✓
• d.Any class, because total costs are identical over a 20-year period

A large, long-horizon investment favors Class A shares: the front-end charge is heavily discounted by breakpoints and the low ongoing 12b-1 fee compounds into a smaller drag over two decades. Class B shares typically are not even offered at this size and carry higher ongoing fees during the CDSC period. Class C shares charge a higher level fee every year, which over 20 years costs far more than a discounted front-end load.

An investor plans to place $15,000 in a fund but expects to need the money in about two to three years. Which share class is generally most suitable?

• a.Class B shares, because the deferred charge is waived after one year
• b.Class A shares, because the front-end load is smallest over short periods of investment of only a year or two before the money is needed
• c.Class C shares, because there is little or no front-end charge and only a short contingent deferred charge✓
• d.No mutual fund is suitable for any holding period shorter than five years

Class C shares impose a level annual asset-based fee with at most a small CDSC that usually lapses after 12 months, which keeps costs low over a short holding period. A front-end load on Class A shares is paid up front and cannot be recovered in two or three years at this dollar amount. Class B deferred charges typically run several years, and it is not accurate to say no fund fits a short horizon.

Which statement most accurately describes Class B mutual fund shares?

• a.They pay no 12b-1 fee because the sales charge is deferred
• b.They may be redeemed at any time with no sales charge of any kind
• c.They carry a front-end sales charge and the lowest annual expenses of any class
• d.They carry a contingent deferred sales charge that declines each year and typically convert to Class A shares after a set period✓

Class B shares are sold without a front-end load but impose a back-end charge that steps down annually and eventually disappears, after which the shares usually convert to the lower-expense Class A shares. During the deferred-charge period Class B shares carry higher 12b-1 fees, not none. Redeeming early does trigger the CDSC.

A fund's expense ratio represents:

• a.The percentage of the portfolio turned over during the year through the manager's ongoing buying and selling
• b.The difference between the bid and the ask price of the shares as quoted for the shares in the secondary market
• c.Annual operating costs, including management and 12b-1 fees, as a percentage of average net assets✓
• d.The sales charge stated as a percentage of the public offering price charged at the time of each purchase

The expense ratio measures ongoing annual costs of running the fund, chiefly the advisory fee, 12b-1 fee, and other operating expenses, divided by average net assets. Sales charges are one-time transaction costs and are shown separately in the fee table. Portfolio turnover and the bid-ask spread are different measures entirely.

When a shareholder redeems open-end fund shares, the fund must transmit payment within:

• a.Seven calendar days✓
• b.Thirty calendar days
• c.One business day
• d.Three business days

The Investment Company Act of 1940 requires redemption proceeds to be paid within seven calendar days of a proper request, absent an SEC-permitted suspension. One and three days reflect general securities settlement conventions, not the statutory redemption deadline, and thirty days is far outside the requirement.Investment Company Act of 1940

To be classified as a diversified investment company, a fund must satisfy the 75-5-10 test, which requires that:

• a.At least 75% of assets be in equities, 5% in cash, and 10% in bonds
• b.At least 75% of assets be invested with no more than 5% in any one issuer and no more than 10% of any issuer's voting securities held✓
• c.No more than 75% of assets be in one industry, 5% in derivatives, and 10% in foreign issuers
• d.At least 75 different issuers be held, with 5% minimum and 10% maximum positions

The diversification test applies to 75% of total assets: within that portion, no single issuer may exceed 5% of assets and the fund may not own more than 10% of any issuer's voting stock. The remaining 25% is unrestricted. The other choices invent asset-allocation or issuer-count requirements that do not appear in the Act.Investment Company Act of 1940

Which statement correctly distinguishes accumulation units from annuity units in a variable annuity?

• a.Both the number of units and their value are fixed once the contract is issued
• b.Accumulation units have a fluctuating value but annuity units have a fixed value
• c.Accumulation units vary in number as the contract owner invests, while at annuitization a fixed number of annuity units is established whose value fluctuates✓
• d.Annuity units are purchased during the pay-in phase and accumulation units during the payout phase

During the accumulation phase, each purchase payment buys a varying number of accumulation units, so the unit count grows. At annuitization the accumulated value is converted into a fixed number of annuity units, and the payment changes only because the unit value moves with separate account performance. The other choices reverse the phases or freeze the wrong variable.

A variable annuity contract has an assumed interest rate (AIR) of 4%. In a month when the separate account earns 6%, the annuitant's next payment will:

• a.Be suspended until performance returns to the AIR
• b.Decrease compared with the prior payment
• c.Remain the same, because the AIR guarantees a level payment
• d.Increase compared with the prior payment✓

The AIR is the benchmark used to price annuity payments, so performance above it raises the annuity unit value and the payment goes up. Performance below the AIR would lower the payment, and performance exactly equal to it would hold the payment level. The AIR is a calculation assumption, not a guarantee, and payments are never suspended for poor performance.

Which annuity payout option generally produces the largest monthly payment for a given account value?

• a.Joint and last survivor
• b.Life with 20-year period certain
• c.Unit refund life annuity
• d.Straight life (life only)✓

A life-only payout ends at the annuitant's death with no residual benefit to anyone, so the insurer can pay the most each month. Every other option adds a guarantee to a second person or a minimum number of payments, and that added obligation reduces the monthly amount. Joint and last survivor typically produces the smallest payment because two lives must be covered.

A married couple, both age 66, want annuity income that continues for as long as either of them is alive. Which settlement option fits?

• a.Unit refund life annuity
• b.Straight life on the older spouse
• c.Joint and last survivor✓
• d.Life with 10-year period certain

A joint and last survivor option pays until the death of the second annuitant, which is exactly what the couple described. Straight life stops at the first death, leaving the survivor with nothing. A period certain or unit refund option guarantees only a limited number of payments or a return of principal, not lifetime income for the survivor.

A surrender charge on a deferred variable annuity is best described as:

• a.A contractual charge on early withdrawals that typically declines each year and eventually disappears✓
• b.A fee charged annually for as long as the contract is held
• c.A penalty imposed by the IRS on withdrawals before age 59 1/2
• d.A charge deducted from every purchase payment before it is invested in the contract's separate account subaccounts

The surrender charge is the insurance company's way of recovering distribution costs if the owner withdraws money during the early contract years, and the schedule steps down annually until it reaches zero. It is not an annual fee on all assets and it is not the IRS penalty, which is a separate 10% tax on premature distributions. Variable annuities generally have no front-end sales load deducted from deposits.

A customer wants to move the full value of an existing non-qualified variable annuity into a different insurer's non-qualified annuity. Handled correctly, this transaction:

• a.Triggers tax only on the amount that exceeds the original cost basis of the surrendered original contract
• b.Triggers ordinary income tax on the entire account value
• c.Is prohibited because annuity contracts cannot be transferred between insurers under the terms of state insurance law
• d.Is a 1035 exchange and is not a taxable event, though surrender charges may still apply✓

Section 1035 of the Internal Revenue Code allows an annuity-to-annuity exchange without current taxation as long as the funds move directly between carriers and the annuitant does not take possession. Cost basis carries over to the new contract. The exchange does not waive the old contract's surrender charges or the new contract's new surrender schedule, which is why suitability review is required.Internal Revenue Code Section 1035

Which of the following exchanges does NOT qualify for tax-free treatment under Section 1035?

• a.An annuity contract exchanged for a life insurance policy✓
• b.A life insurance policy exchanged for another life insurance policy
• c.A life insurance policy exchanged for an annuity contract
• d.An annuity contract exchanged for another annuity contract

Section 1035 permits life-to-life, life-to-annuity, and annuity-to-annuity exchanges, but not annuity-to-life, because that would move funds from a contract whose gains are always taxable into one whose death benefit can pass income tax free. The other three combinations are expressly allowed. Representatives must confirm the direction of the exchange before recommending it.Internal Revenue Code Section 1035

A 52-year-old owner of a non-qualified deferred annuity withdraws $20,000 from a contract with $60,000 of earnings and $40,000 of after-tax contributions. What is the tax result?

• a.The entire $20,000 is taxed as ordinary income and is subject to a 10% early withdrawal penalty✓
• b.The entire $20,000 is taxed as a long-term capital gain
• c.Half is ordinary income and half is a return of principal because the contract is treated as only partly annuitized
• d.The entire $20,000 is a tax-free return of principal

Non-qualified annuity withdrawals are taxed last-in, first-out, so earnings come out first and are taxed as ordinary income; because the owner is under 59 1/2, an additional 10% penalty applies to the taxable amount. Principal is not returned until all earnings have been withdrawn, so no part of this withdrawal is tax free. Annuity earnings never receive capital gains treatment.Internal Revenue Code

When a non-qualified annuity is annuitized, the exclusion ratio is used to:

• a.Calculate the surrender charge remaining on the contract during each remaining year of the payout phase
• b.Set the assumed interest rate for the payout phase
• c.Determine what portion of each payment is a tax-free return of the owner's after-tax cost basis✓
• d.Allocate the death benefit between beneficiaries

Once payments begin, each one is split between a tax-free recovery of the after-tax investment and a taxable portion representing earnings, and the exclusion ratio sets that split. Surrender charges, the AIR, and beneficiary allocations are governed by the contract, not by this tax formula. Once basis is fully recovered, later payments are fully taxable.Internal Revenue Code

In a scheduled premium variable life insurance policy:

• a.Both the death benefit and the cash value are guaranteed by the insurer for the entire life of the policy contract
• b.Neither the death benefit nor the cash value can change after issue
• c.A minimum death benefit is guaranteed, while the cash value is not guaranteed and may fall to zero✓
• d.The cash value is guaranteed but the death benefit varies with separate account performance in every policy year without exception

Variable life provides a guaranteed minimum face amount as long as scheduled premiums are paid, but the cash value rides entirely on separate account results and carries no floor. Guaranteeing the cash value would defeat the variable structure. The death benefit above the minimum can also rise with strong investment performance, so nothing about the policy is fully fixed.

A representative who wants to sell variable life insurance must hold:

• a.Only a state insurance license, because the product is an insurance contract
• b.Both a state insurance license and the appropriate securities registration✓
• c.Neither, if the policy is sold through an insurance agency
• d.Only a securities registration, because the separate account is registered with the SEC

Variable products are dual-regulated: the insurance element requires a state license, while the separate account interest is a security requiring FINRA registration through a broker-dealer. Holding just one credential is insufficient regardless of where the sale takes place. This is a central reason the Series 6 exists as a limited representative registration.Securities Act of 1933

Assets supporting a variable annuity's investment performance are held in:

• a.The broker-dealer's proprietary trading account
• b.A custodial bank account owned directly by the contract holder and held in the contract holder's own individual name
• c.The insurer's general account, where they are backed by the insurer's claims-paying ability and the insurer's own general reserves
• d.A separate account, which is registered as an investment company and holds the underlying subaccounts✓

Variable annuity assets sit in a separate account that is legally insulated from the insurer's creditors and registered under the Investment Company Act of 1940, usually as a unit investment trust. The general account backs fixed products, where the insurer bears the investment risk. Contract holders own an interest in the separate account, not the securities themselves, and no broker-dealer account is involved.Investment Company Act of 1940

Which feature distinguishes a unit investment trust from a management company?

• a.A UIT has a board of directors that hires an investment adviser
• b.A UIT actively trades its portfolio to outperform a benchmark
• c.A UIT holds a fixed portfolio, has no board of directors or investment adviser, and has a stated termination date✓
• d.A UIT issues shares that trade on an exchange at a premium or discount

A unit investment trust is organized under a trust indenture with a fixed, unmanaged portfolio and a preset termination date, so it needs neither a board nor an adviser. Active trading and adviser oversight are hallmarks of management companies. Exchange trading at a premium or discount describes closed-end funds, and UIT units are redeemable.Investment Company Act of 1940

Shares of a closed-end investment company differ from open-end fund shares because closed-end shares:

• a.Are always sold with a maximum 8.5% sales charge under FINRA's cap on total fund sales charges
• b.Are redeemable with the fund at net asset value on any business day at the shareholder's own request
• c.Trade in the secondary market at a price that may be above or below net asset value✓
• d.Cannot be purchased in the secondary market by retail investors through an ordinary retail broker-dealer

A closed-end fund issues a fixed number of shares in an offering and those shares then trade among investors, so supply and demand determine whether they sell at a premium or a discount to NAV. Redeemability at NAV is the defining feature of open-end funds. Closed-end trades involve brokerage commissions rather than the 8.5% sales charge ceiling, and any investor may buy them in the market.

An open-end investment company may issue:

• a.Only one class of voting common stock, with different sales charge arrangements permitted✓
• b.Common stock and long-term bonds, but no preferred stock
• c.Any capital structure approved by a majority of the board
• d.Both common shares and multiple classes of preferred shares that carry equal voting and liquidation rights

An open-end fund is limited to a single class of voting stock, though it may offer that stock through different sales charge structures such as Class A, B, and C shares. Senior securities such as preferred stock and bonds may be issued by closed-end funds, not open-end funds. The board cannot vote to override this statutory capital structure limit.Investment Company Act of 1940

A 529 college savings plan interest is classified for regulatory purposes as:

• a.An exempt security not subject to any securities regulation
• b.An open-end investment company registered under the Investment Company Act of 1940
• c.A variable annuity separate account interest
• d.A municipal fund security, subject to MSRB rules✓

Because 529 plans are established by states, their interests are municipal fund securities and sales practices are governed by MSRB rules rather than by the Investment Company Act. Investors receive an official statement or program disclosure document rather than a statutory prospectus. Calling them completely unregulated is wrong, as suitability, disclosure, and advertising rules all apply.Internal Revenue Code Section 529

A grandparent withdraws $8,000 from a 529 plan and uses all of it for the beneficiary's college tuition. The federal tax treatment of the earnings portion is:

• a.Taxable as ordinary income with a 10% penalty on the entire amount that was distributed
• b.Taxable as a long-term capital gain on the earnings that had accumulated in the plan
• c.Taxable to the beneficiary at the beneficiary's rate because 529 withdrawals shift the tax to the enrolled student
• d.Not taxable, because the distribution was used for qualified education expenses✓

Earnings in a 529 plan grow tax deferred and come out entirely free of federal income tax when the distribution pays qualified education expenses such as tuition. Tax and a 10% penalty on earnings apply only to non-qualified withdrawals. Contributions are made with after-tax dollars, so no federal deduction was taken going in.Internal Revenue Code Section 529

Which statement about control of a 529 plan account is accurate?

• a.Control passes to the beneficiary's parents once the beneficiary enrolls in college
• b.The state sponsoring the plan controls how the assets are invested
• c.The beneficiary gains full control of the account at the age of majority
• d.The account owner retains control, may change the beneficiary to another qualified family member, and may take a non-qualified withdrawal✓

Unlike a custodial account, a 529 plan leaves ownership and control with the person who opened it, including the right to redirect the funds to a different eligible family member. The beneficiary has no ownership right and never takes control by reaching a certain age. The state establishes the plan and its investment menu, but the owner chooses among the offered options.Internal Revenue Code Section 529

The Investment Company Act of 1940 classifies investment companies into which three types?

• a.Open-end funds, closed-end funds, and hedge funds as the categories defined by the statute
• b.Growth funds, income funds, and balanced funds, grouped by their stated investment objective
• c.Face-amount certificate companies, unit investment trusts, and management companies✓
• d.Mutual funds, exchange-traded funds, and separate accounts, the three statutory categories named in the Investment Company Act of 1940

The Act defines exactly three classifications, with management companies then subdivided into open-end and closed-end. Hedge funds are typically structured to rely on exclusions from the Act rather than being a statutory class. ETFs and separate accounts are organized within the existing classifications, and growth, income, and balanced describe investment objectives rather than legal form.Investment Company Act of 1940

To be treated as a regulated investment company and avoid paying tax at the fund level on distributed income, a fund must distribute at least:

• a.90% of its net investment income to shareholders✓
• b.75% of its realized capital gains to shareholders
• c.50% of its net investment income to shareholders
• d.100% of its gross income to shareholders

Under Subchapter M of the Internal Revenue Code, a fund that distributes at least 90% of its net investment income acts as a conduit and is taxed only on what it retains. Falling below that threshold subjects the fund's entire income to corporate taxation, creating a second layer of tax for shareholders. Distributing all gross income is neither required nor possible after expenses.Internal Revenue Code

When must a prospectus be delivered to a purchaser of open-end fund shares?

• a.Only if the customer requests it in writing, since delivery is otherwise left to the selling representative's discretion
• b.Within 30 days after the trade settles, the deadline the rules set for post-sale prospectus delivery
• c.At or before the confirmation of the sale, and always before or during any solicitation of the sale✓
• d.Only for purchases exceeding $10,000, the dollar threshold above which the disclosure requirement is triggered

Because open-end funds are in continuous primary distribution, every purchase is a new issue and the buyer must receive the current prospectus no later than the confirmation. Delivery is mandatory regardless of dollar amount and does not depend on a customer request. A delivery 30 days after settlement would deprive the investor of disclosure before the investment decision.Securities Act of 1933

A customer asks for more detail about a fund's officers, its brokerage allocation practices, and its full financial statements. This information is found in the:

• a.Form filed only with the state insurance commissioner and not made available to retail customers
• b.Statement of Additional Information, which must be provided free upon request✓
• c.Annual report only, which is sent every three years mailed only to the fund's shareholders of record
• d.Official statement filed with the MSRB

The Statement of Additional Information supplements the prospectus with detailed operational, governance, and financial disclosure and must be sent at no charge to any shareholder or prospective investor who asks. Shareholder reports are sent at least semiannually and contain less operational detail. Official statements relate to municipal securities and insurance filings to insurance products.Investment Company Act of 1940

For purposes of combining purchases to reach a breakpoint, which of the following does NOT qualify as a single "person"?

• a.An investment club whose members pool their money✓
• b.A husband and wife purchasing in a joint account
• c.A parent purchasing in a UTMA account for a minor child
• d.An individual investor

Breakpoint aggregation is available to an individual, a married couple, and their minor children's custodial accounts because those represent one family unit. Investment clubs, partnerships, and other groups formed mainly to obtain a reduced sales charge are expressly excluded. Allowing clubs to aggregate would let unrelated investors buy their way into discounts intended for a single household.FINRA Rule 2341 (Investment Company Securities)

A shareholder elects to have all fund dividends and capital gains distributions automatically reinvested. Those reinvested amounts purchase additional shares at:

• a.A 50% discount to the public offering price
• b.The public offering price, including the full sales charge
• c.Net asset value, with no sales charge✓
• d.The prior month's average share price

Automatic reinvestment at NAV is one of the features a fund must offer to charge the maximum sales load, and it lets distributions compound without a new sales charge. Charging the full load on reinvested distributions would penalize long-term holders. Neither a fixed 50% discount nor a monthly average price is used, because forward pricing governs the transaction.

The principal purpose of the Securities Act of 1933 is to:

• a.Regulate trading on exchanges and in the over-the-counter market, which is actually the role assigned to the Securities Exchange Act of 1934
• b.Set minimum capital requirements for investment companies
• c.Establish the SEC and require broker-dealer registration
• d.Require full and fair disclosure of material facts when securities are offered to the public for the first time✓

The 1933 Act governs the primary market, requiring registration of new offerings and delivery of a prospectus so investors can judge the offering for themselves. Secondary market regulation, SEC creation, and broker-dealer registration come from the Securities Exchange Act of 1934. Fund capital requirements come from the Investment Company Act of 1940.Securities Act of 1933

Registration of a securities offering with the SEC means that:

• a.The SEC guarantees the accuracy of the statements in the prospectus
• b.The issuer's financial condition has been certified as sound by the SEC
• c.The SEC has approved the offering as suitable for retail investors
• d.The issuer has filed the required disclosure and the SEC has not objected; the SEC does not approve the offering or vouch for its merits✓

The SEC's review is a disclosure review only; it never passes on the merits of an offering and it is unlawful to tell a customer otherwise. Suggesting approval, a guarantee of accuracy, or certification of financial strength misrepresents the agency's role. Every prospectus carries a disclaimer to this effect.Securities Act of 1933

Which of the following is an exempt security under the Securities Act of 1933?

• a.Common stock of a listed manufacturing company
• b.General obligation bonds issued by a state or municipality✓
• c.Units of a unit investment trust holding corporate bonds, which are exempt from registration as government-related instruments
• d.Shares of a newly organized open-end investment company

Municipal and U.S. government securities are exempt from the registration requirements of the 1933 Act, though the antifraud provisions still apply. Investment company shares, including UIT units, must be registered and sold with a prospectus. Corporate equity offerings are the classic example of securities that must be registered.Securities Act of 1933

During the cooling-off period for a registered offering, a representative may:

• a.Send a preliminary prospectus and accept non-binding indications of interest✓
• b.Confirm sales at the anticipated offering price once indications of interest have been collected
• c.Accept payment from customers who commit to buy
• d.Send research reports praising the issuer to prospective buyers to build early demand for the issue

Between filing and effectiveness, the only permitted activities are distributing the preliminary prospectus, or red herring, and gathering indications of interest that bind no one. Taking money, confirming sales, or circulating promotional material would be an illegal offer or sale of an unregistered security. Sales may occur only after the registration is declared effective and the final prospectus is available.Securities Act of 1933

The Securities Exchange Act of 1934 is best known for:

• a.Requiring a prospectus for every new issue of securities sold to the public in the primary market
• b.Establishing IRA contribution limits and the annual deferral caps for retirement accounts
• c.Defining the three classes of investment companies named in the Investment Company Act of 1940
• d.Creating the SEC and regulating the secondary market, broker-dealers, and exchanges✓

The 1934 Act created the SEC and gave it authority over trading markets, broker-dealer registration, reporting by public companies, and market manipulation. New-issue prospectus requirements belong to the 1933 Act, investment company classifications to the 1940 Act, and IRA rules to the Internal Revenue Code.Securities Exchange Act of 1934

Under the Investment Company Act of 1940, what portion of a registered fund's board must consist of directors who are not affiliated with the fund's adviser or underwriter?

• a.At least 40%✓
• b.No minimum is specified
• c.At least 10%
• d.At least 25%

The Act requires that non-interested, independent directors make up at least 40% of the board so that shareholder interests have meaningful representation when advisory contracts are reviewed. Many funds voluntarily exceed this level, but 40% is the statutory floor. The lower percentages and the claim that no minimum exists both understate the requirement.Investment Company Act of 1940

Before a newly formed open-end fund may offer shares to the public, the Investment Company Act of 1940 requires it to have:

• a.At least $1 million of net assets and a five-year performance record
• b.A minimum of 500 shareholders and a state banking charter
• c.Approval from FINRA's board of governors
• d.At least $100,000 of net assets and at least 100 shareholders✓

The Act sets a modest seed-capital requirement of $100,000 in net worth and a minimum of 100 shareholders before a public offering may begin, ensuring the fund is a genuine going concern. There is no performance-record or million-dollar requirement, and a new fund by definition has no track record. FINRA reviews underwriting arrangements but does not authorize the fund's existence.Investment Company Act of 1940

A fund's board wants to change the fund from a growth objective to an aggressive high-yield bond objective. This change requires:

• a.SEC approval, but no shareholder involvement
• b.Written notice to shareholders 30 days in advance, with no vote required
• c.Only a majority vote of the board of directors
• d.Approval by a majority vote of the fund's outstanding shares✓

A change in a fundamental investment objective or policy is reserved to shareholders and requires a majority vote of outstanding voting securities. Investors bought into a stated strategy, so the board alone cannot redirect their money. Notice without a vote and SEC approval without shareholder input both bypass the required shareholder franchise.Investment Company Act of 1940

Breakpoint selling is best defined as:

• a.Recommending Class A shares to a customer with a short time horizon
• b.Selling shares of two different fund families to the same customer
• c.Charging a sales load on reinvested dividends
• d.Recommending a purchase just below the amount that would qualify for a reduced sales charge, without disclosing the discount✓

Breakpoint selling deprives the customer of a quantity discount so the representative earns a larger commission, which is why it is treated as a sales practice violation. Diversifying across fund families is permissible when suitable, though it may forfeit breakpoints and should be discussed. Charging loads on reinvested dividends and mismatching share classes are separate problems.FINRA Rule 2341 (Investment Company Securities)

A representative repeatedly redeems a customer's shares in one fund family and reinvests the proceeds in a similar fund at another family, generating a new sales charge each time. This practice is called:

• a.Switching, and it is prohibited✓
• b.Selling dividends, a fully permissible way to boost a client's income before the record date
• c.Rights of accumulation, the recognized industry term for churning a fund position for extra commissions
• d.Front-running, the specific name the rules give to this repeated redemption-and-reinvestment pattern

Moving a customer between funds with substantially similar objectives solely to generate additional sales charges is switching, and absent a documented benefit to the customer it is a prohibited practice. Front-running involves trading ahead of a known block order. Selling dividends concerns timing a purchase around a distribution, and rights of accumulation is a legitimate breakpoint feature.FINRA Rules

Urging a customer to buy fund shares immediately so the customer can "capture" an upcoming distribution is prohibited because:

• a.The customer would be required to hold the shares for 12 months
• b.Distributions cannot be paid to shareholders of record for the first 30 days
• c.The share price drops by the amount of the distribution, so the customer gains nothing and incurs a current tax liability✓
• d.Funds are not permitted to pay distributions more than once a year

Selling dividends is deceptive because the NAV falls by the distribution amount on the ex-date, leaving the investor with the same total value but an immediate taxable event. There is no 30-day record-date restriction, no annual limit on distributions, and no mandatory holding period. The customer is worse off after tax, which is why the pitch is prohibited.FINRA Rules

A representative learns that an institutional customer is about to place a very large buy order and immediately buys the same security for a personal account. This is:

• a.Permitted, because personal trades are unrelated to customer business
• b.Front-running, a prohibited practice and a form of market abuse✓
• c.Permitted if the representative discloses the trade to a supervisor afterward
• d.Permitted if the personal order is smaller than the customer's order

Trading ahead of a customer's known block order to profit from the expected price move misuses confidential customer information and is prohibited regardless of size or after-the-fact disclosure. The prohibition applies to accounts in which the representative has any beneficial interest. Supervisors cannot bless conduct that is itself a violation.Securities Exchange Act of 1934

A customer is nervous about market volatility and the representative offers to personally reimburse any losses in the first year. This offer is:

• a.Acceptable only for accounts under $25,000
• b.Acceptable if the branch manager approves it in writing and the firm files the required disclosure
• c.Prohibited, because a registered person may not guarantee a customer against loss✓
• d.Acceptable if the representative documents it in the client file and also notifies the branch office manager

Guaranteeing a customer against loss is flatly prohibited; it misrepresents the risk of the investment and creates an obligation the firm has not sanctioned. No amount of documentation, supervisory approval, or account size makes the promise permissible. Sharing in losses is permitted only under narrow joint-account rules with written firm and customer approval and proportionate capital contribution.FINRA Rules

A registered representative may share in the profits and losses of a customer's account only if:

• a.The account is a joint account with an immediate family member of the customer
• b.The firm and the customer give prior written approval and sharing is proportionate to the representative's financial contribution✓
• c.The representative contributes at least 50% of the account's capital
• d.The customer requests it verbally and the representative keeps notes

Profit sharing is permitted only with written consent from both the member firm and the customer, and the representative's share must match the money actually contributed. Verbal permission is never sufficient. There is no 50% contribution rule, and a family relationship between customer and representative does not by itself authorize sharing.FINRA Rules

A representative tells a prospect, "Buy this fund before Friday's record date so you get the $0.40 per share distribution for free." This statement is:

• a.Prohibited, because it is selling dividends and misrepresents an economic benefit✓
• b.Prohibited only if the customer holds the shares less than 60 days measured after the record date
• c.Acceptable if the customer is in a low tax bracket and does not itemize any deductions on the return
• d.Acceptable because the distribution is a real benefit to shareholders who buy in just before the record date

The pitch is selling dividends: the fund's NAV declines by the distribution amount, so the investor simply converts part of the investment into a taxable payment. A low tax bracket reduces the harm but does not make the misrepresentation acceptable. The violation lies in the misleading sales pitch, not in any holding period.FINRA Rules

Which of the following would most likely be viewed as a prohibited practice by a registered representative?

• a.Sending a customer a copy of the fund's current prospectus
• b.Depositing a customer's check into the representative's own bank account overnight before forwarding it✓
• c.Documenting a customer's risk tolerance before a recommendation
• d.Recommending a Class A purchase at a breakpoint the customer qualifies for under the fund's published breakpoint schedule

Commingling customer funds with a representative's personal funds, even briefly, is a serious violation and can constitute conversion. Recommending a breakpoint-qualified purchase, delivering a prospectus, and documenting risk tolerance are all required or encouraged practices. Customer checks must be forwarded promptly to the firm.FINRA Rules

Under FINRA's communications rules, a written message distributed to more than 25 retail investors within any 30 calendar-day period is classified as:

• a.A public appearance
• b.Correspondence
• c.A retail communication✓
• d.An institutional communication

The 25-recipient threshold in a rolling 30-day window separates correspondence from retail communications, and exceeding it triggers the stricter principal approval and filing framework. Institutional communications are those directed only to institutional investors. A public appearance covers unscripted live presentations rather than written material.FINRA Rule 2210 (Communications with the Public)

A representative emails an identical market update to 18 individual retail clients in one month. This communication is categorized as:

• a.An advertisement requiring filing with FINRA
• b.An institutional communication exempt from review, because it went to more than the retail delivery threshold of recipients
• c.Correspondence, subject to supervision and review procedures✓
• d.A retail communication requiring pre-use principal approval within ten business days of first use

Because the message reaches 25 or fewer retail investors within 30 days, it is correspondence, which firms must supervise and review under their written procedures but need not approve before use. Crossing the 25-recipient line would convert it into a retail communication. Retail clients are not institutional investors, and correspondence is not filed with FINRA.FINRA Rule 2210 (Communications with the Public)

An institutional communication is one distributed exclusively to:

• a.Prospective retail customers who have signed a suitability waiver
• b.Institutional investors such as banks, insurance companies, registered investment companies, and qualifying entities✓
• c.Employees of the member firm
• d.Any customer with an account balance over $250,000

The institutional category depends on the type of recipient, not on account size or paperwork, and covers entities such as banks, insurers, registered investment companies, and other qualifying institutions. A wealthy individual is still a retail investor. Suitability obligations cannot be waived by a customer signature.FINRA Rule 2210 (Communications with the Public)

Retail communications must generally be:

• a.Approved by the SEC before use and formally cleared for public distribution first
• b.Approved by the customer in writing before the firm may distribute the material to anyone
• c.Approved by an appropriately registered principal before first use or filing✓
• d.Reviewed by the fund's board of directors and the fund's transfer agent before distribution

A registered principal of the firm must sign off on retail communications before they are used or filed, which places accountability inside the member firm. The SEC does not pre-approve sales material, and fund boards oversee the fund rather than a distributor's advertising. Customers never approve communications directed at them.FINRA Rule 2210 (Communications with the Public)

How long must a member firm retain records of its communications with the public?

• a.Permanently, with no exception, the same standard the SEC applies to a firm's audited financial reports
• b.One year from the date of first use, after which the material may be discarded from all firm systems
• c.Five years from the date of creation, consistent with the anti-money-laundering recordkeeping period
• d.Three years from the date of last use, and the first two years in an easily accessible place✓

Communications records must be kept for three years from last use, with the earliest two years readily accessible for examination. The one-year and permanent options misstate the requirement. The five-year period applies to certain anti-money laundering records, not to general communications.FINRA Rule 2210 (Communications with the Public)

A retail communication concerning a registered investment company that includes fund performance generally must be filed with FINRA:

• a.Only if a customer complains about it
• b.Within 90 days after the end of the calendar quarter
• c.Within 10 business days of first use✓
• d.At least 10 business days before first use, in every case

Most investment company retail communications are filed with FINRA's Advertising Regulation Department within 10 business days after first use. Pre-use filing applies to specific categories, such as material from a firm in its first year of membership or communications about certain complex products. Quarterly batching and complaint-triggered filing are not part of the rule.FINRA Rule 2210 (Communications with the Public)

Which practice is permitted when presenting mutual fund performance in a retail communication?

• a.Describing a bond fund's yield as guaranteed because the portfolio is investment grade and of very high investment-grade credit quality
• b.Projecting the fund's expected return over the next five years
• c.Showing only the fund's best three-year period
• d.Showing standardized average annual total returns for 1-, 5-, and 10-year periods, or the life of the fund✓

Standardized total returns for the required periods, current as of the most recent quarter end, give investors a consistent basis for comparison. Cherry-picking a favorable period, projecting future performance, and calling any return guaranteed are all misleading and prohibited. Communications must also disclose that past performance does not predict future results.FINRA Rule 2210 (Communications with the Public)

A firm wants to include a customer testimonial in a retail communication. Which requirement applies?

• a.The testimonial must be notarized by the customer
• b.The testimonial must be filed with the SEC before use
• c.Testimonials are prohibited in all securities communications
• d.The communication must disclose that the experience may not be typical and, if compensation was paid, that fact must be disclosed✓

Testimonials are allowed with clear disclosure that the quoted experience is not necessarily representative and that any material payment to the person was made. Notarization is not required, and pre-use SEC filing is not part of FINRA's advertising framework. Testimonials about technical securities advice also require disclosure of the speaker's qualifications.FINRA Rule 2210 (Communications with the Public)

A customer deposits $12,000 in cash in a single business day. The firm must file:

• a.Nothing, because the deposit is under $25,000
• b.Form 1099-B with the IRS
• c.A Suspicious Activity Report only
• d.A Currency Transaction Report✓

Currency transactions of more than $10,000 in one business day trigger a Currency Transaction Report under the Bank Secrecy Act, regardless of whether anything appears suspicious. A SAR is required only when the activity itself raises suspicion. Form 1099-B reports proceeds of sales, not deposits.Bank Secrecy Act

When a firm files a Suspicious Activity Report on a customer's transactions, the firm:

• a.Must not notify the customer that a SAR was filed✓
• b.Must close the account immediately
• c.Must give the customer a copy within 10 business days
• d.May notify the customer only with the customer's written consent

Tipping off a customer about a SAR filing is prohibited because it would compromise any resulting investigation. SARs generally apply to suspicious transactions of $5,000 or more and are filed with FinCEN, typically within 30 days of detection. Filing does not automatically require closing the account, though the firm may choose to do so.Bank Secrecy Act

A firm's customer identification program must, at a minimum, collect which information from a new individual customer?

• a.Employer name, annual income, net worth, and investment experience collected and retained for the firm's own records
• b.Name, date of birth, physical address, and taxpayer identification number✓
• c.Passport number and two professional references
• d.Credit score, marital status, and number of dependents collected for the customer's new-account file

The customer identification program requires name, date of birth, a street address, and a government identification number so the firm can form a reasonable belief that it knows the customer's identity. Financial profile items such as income and net worth are gathered for suitability purposes, not identity verification. Credit scores and references are not CIP elements.USA PATRIOT Act

Before opening an account, a firm must check the prospective customer's name against the list of Specially Designated Nationals maintained by:

• a.The Office of Foreign Assets Control✓
• b.FINRA's Central Registration Depository
• c.The Municipal Securities Rulemaking Board
• d.The Securities Investor Protection Corporation

OFAC publishes the Specially Designated Nationals list, and firms are prohibited from doing business with parties named on it. The CRD holds registration records for individuals and firms, the MSRB writes municipal rules, and SIPC provides limited account protection if a broker-dealer fails. None of those three maintains sanctions lists.USA PATRIOT Act

In an account registered as joint tenants with rights of survivorship, when one owner dies:

• a.The account converts automatically to tenants in common between the surviving owner and the deceased owner's estate
• b.The deceased owner's interest passes to the deceased owner's estate under the residuary clause of the deceased owner's will
• c.The deceased owner's interest passes automatically to the surviving owner✓
• d.The account must be liquidated and the proceeds split evenly

Rights of survivorship mean the surviving tenant takes full ownership without the assets passing through probate. Passing the interest to the estate is the defining feature of tenants in common, not JTWROS. Nothing in the registration forces liquidation or an automatic change of form, though the firm will require a death certificate and new paperwork.

Two business partners open an account as tenants in common with a 70/30 ownership split. If one partner dies, that partner's share:

• a.Passes to the surviving partner
• b.Reverts to the broker-dealer until a court orders distribution
• c.Passes to the deceased partner's estate according to that partner's will or state law✓
• d.Is divided equally between the surviving partner and the deceased's heirs by operation of state law

Tenants in common allows unequal ownership percentages and each owner's share passes to the owner's estate rather than to the co-tenant. Survivorship is the JTWROS feature and does not apply here. A broker-dealer never takes ownership of customer assets; it freezes the account pending proper documentation.

Which statement about an UTMA custodial account is correct?

• a.Gifts to the account may be revoked by the donor at any time
• b.The custodian may pledge the account's securities as collateral for a personal loan only with the custodian's written notice to the firm
• c.The account may have two custodians so parents can share responsibility for the single minor beneficiary of the account
• d.Gifts are irrevocable, and the account may have only one custodian and one minor beneficiary✓

A gift into a custodial account is an irrevocable transfer to the minor, and the structure permits exactly one custodian and one minor per account. Joint custodians and joint minors are not allowed, so parents wanting shared control cannot achieve it through the registration. Using the minor's property for the custodian's benefit would violate the custodian's fiduciary duty.Uniform Transfers to Minors Act

An UGMA account for an 11-year-old is registered under which taxpayer identification number, and how is income reported?

• a.The donor's Social Security number, with income taxed to the donor
• b.The custodian's Social Security number, with income taxed to the custodian
• c.The broker-dealer's tax identification number, with income taxed to the firm
• d.The minor's Social Security number, with income taxed to the minor✓

Although the custodian controls the account, the property belongs to the minor, so the minor's Social Security number appears on the registration and the minor is the taxpayer. Some unearned income of a young child may still be taxed at the parents' rate under the kiddie tax rules, but the income is reported for the minor. The custodian, donor, and firm are never the account's taxpayer.Uniform Gifts to Minors Act

When the beneficiary of a custodial account reaches the age of majority set by state law:

• a.The assets must be re-registered in the former minor's own name and control passes to that person✓
• b.Ownership reverts to the original donor
• c.The custodian may continue managing the account indefinitely for as long as the family wishes it to continue
• d.The account must be liquidated and the proceeds donated

Custodianship ends at the state's age of majority or termination age, and the property is retitled in the now-adult beneficiary's name with full control over it. The custodian's authority is not open-ended. Because the original gift was irrevocable, neither the donor nor anyone else can reclaim the assets.Uniform Transfers to Minors Act

To open a brokerage account in the name of a trust, the firm must obtain:

• a.A court order appointing the trustee, in every case before any brokerage account may be opened for the trust
• b.Only the trustee's Social Security number
• c.The trust agreement or a certification of trust identifying the trustee and the trustee's powers✓
• d.Written consent from every trust beneficiary

The firm needs documentation establishing who the trustee is and what investment authority the trust grants before accepting instructions. A personal Social Security number is not sufficient because the trust is a separate legal entity with its own tax identification number. Court appointment and beneficiary consents are not routinely required for a properly documented trust.

Which document must a broker-dealer obtain before opening a corporate cash account?

• a.The personal guarantee of each officer
• b.A corporate resolution identifying who is authorized to trade on the corporation's behalf✓
• c.A copy of the corporation's most recent audited financial statements for the two most recent completed fiscal years
• d.A prospectus for the corporation's own securities

The corporate resolution establishes the entity's authority to open the account and names the individuals empowered to act. Financial statements may be requested in other contexts but are not a prerequisite for a cash account. Officers do not personally guarantee a corporate account, and the corporation's own offering documents are irrelevant.

A customer asks a representative to select which mutual funds to buy and when to buy them, without checking first. The representative may do so only if:

• a.The customer gives written discretionary authority and a principal approves the account for discretionary trading✓
• b.The customer's account exceeds a minimum balance set by the firm
• c.The customer confirms each trade verbally within one business day
• d.The representative documents the customer's verbal instruction in a file memo

Discretion over asset, amount, and timing requires prior written authorization from the customer plus firm acceptance and supervisory review of the discretionary account. Verbal permission is limited to time and price discretion for a specific order on the day it is given. Account size never substitutes for written authority.FINRA Rules

Whether a Traditional IRA contribution is deductible for a given taxpayer depends primarily on:

• a.Whether the contribution is made before or after the calendar year ends
• b.The custodian's fee schedule
• c.The investments selected inside the IRA
• d.Whether the taxpayer or spouse is covered by an employer retirement plan and the taxpayer's modified adjusted gross income✓

Anyone with earned income may contribute to a Traditional IRA, but deductibility phases out based on income when the taxpayer or spouse participates in a workplace plan. Investment choices and custodian fees have no effect on deductibility. Contributions may be made up to the tax filing deadline for the prior year, which affects timing but not the deduction test.Internal Revenue Code

Which statement about Roth IRA distributions is accurate?

• a.Earnings are always taxable but contributions are not
• b.Distributions are taxed the same as Traditional IRA distributions
• c.All distributions are tax free from the day the account is opened
• d.Earnings are tax free if the account has been open five years and the owner is at least 59 1/2, disabled, or deceased, or is buying a first home within limits✓

A qualified Roth distribution requires both the five-year holding period and a qualifying event, and it comes out entirely free of federal income tax. Contributions, having already been taxed, may be withdrawn at any time without tax or penalty, so it is wrong to say nothing is available early. Traditional IRA distributions of deductible contributions and earnings are fully taxable, which is the key difference.Internal Revenue Code

A 44-year-old takes $15,000 from a Traditional IRA to remodel a kitchen. The federal tax consequence is:

• a.No tax and no penalty, because IRA owners may withdraw principal at any time without any restriction on the timing
• b.Ordinary income tax on the taxable amount plus a 10% early distribution penalty✓
• c.Tax only, because home improvements are a qualified expense
• d.A 10% penalty only, with no income tax until age 59 1/2 is finally reached by the account owner

Distributions before age 59 1/2 are included in ordinary income and carry an additional 10% penalty unless an exception applies, and home remodeling is not an exception. The narrow exceptions include death, disability, qualified higher education expenses, up to $10,000 for a first-time home purchase, substantially equal periodic payments, and certain medical costs. Tax and penalty apply together, not one or the other.Internal Revenue Code

Which statement about required minimum distributions is correct?

• a.RMDs apply only to accounts larger than $1 million
• b.Traditional IRA owners must begin RMDs at the age set by current law, while Roth IRA owners face no RMDs during their lifetime✓
• c.Both Traditional and Roth IRA owners must begin RMDs at the same age
• d.Roth IRA owners must begin RMDs but Traditional IRA owners need not

Tax-deferred accounts such as Traditional IRAs must begin distributing at the statutory age, currently 73 and scheduled to rise, because the government eventually wants its deferred tax. Roth IRAs were funded with after-tax dollars, so the original owner never faces lifetime RMDs, though inherited Roth accounts have their own rules. Account size does not determine whether RMDs apply.SECURE Act 2.0

A 401(k) plan is best described as:

• a.A defined contribution plan funded through employee salary deferrals, often with employer matching contributions✓
• b.A non-qualified deferred compensation arrangement available only to executives
• c.An individual retirement account funded solely by the account owner outside of work, with no involvement from the employer at any point
• d.A defined benefit plan that promises a fixed monthly pension

A 401(k) lets employees defer part of their salary into a qualified plan on a pre-tax or Roth basis, frequently with an employer match, and the eventual benefit depends on contributions and investment results. A defined benefit plan guarantees a formula-based pension instead. IRAs are individual accounts, and non-qualified plans are not subject to the same qualified plan rules.Internal Revenue Code

A 403(b) tax-sheltered annuity plan is available to employees of:

• a.Public schools and qualifying 501(c)(3) tax-exempt organizations✓
• b.Federal government agencies exclusively, which fund the plan through the federal Thrift Savings Plan structure
• c.Any corporation with fewer than 100 employees that sponsor a payroll savings arrangement
• d.Self-employed individuals only

Section 403(b) plans serve public education employees and staff of qualifying tax-exempt organizations such as hospitals and charities. Small private employers commonly use SIMPLE or SEP plans, and the self-employed may use SEP or solo 401(k) arrangements. Federal employees participate in the Thrift Savings Plan.Internal Revenue Code

A key characteristic of a SEP IRA is that:

• a.Contributions are made after tax and grow tax free much like a Roth arrangement inside the plan
• b.The plan requires annual actuarial certification
• c.Contributions are made by the employer into IRAs established for eligible employees✓
• d.Only employees may contribute, through salary reduction under a mandatory matching formula set by the plan

A simplified employee pension is funded by employer contributions deposited into each eligible employee's own IRA, which keeps administration light. Salary deferral is the mechanism in 401(k) and SIMPLE plans. SEP contributions are deductible to the employer and grow tax deferred, and no actuary is needed because it is a defined contribution arrangement.Internal Revenue Code

A customer receives a distribution check from a former employer's 401(k) plan and wants to move the money to an IRA. Which statement is correct?

• a.The customer has 12 months to complete the rollover
• b.Rollovers from employer plans to IRAs are not permitted
• c.The customer generally has 60 days to deposit the funds into the IRA, and a direct trustee-to-trustee transfer avoids withholding and the deadline✓
• d.The customer may complete an indirect rollover as many times as desired in a 12-month period

An indirect rollover must be completed within 60 days or the distribution becomes taxable, and plan distributions paid to the participant are generally subject to mandatory federal withholding. A direct transfer between custodians sidesteps both problems and has no frequency limit. IRA-to-IRA indirect rollovers are limited to one in any 12-month period.Internal Revenue Code

Before recommending a variable annuity to a retail customer, a representative must have a reasonable basis grounded in which information?

• a.The performance of the separate account over the past 12 months
• b.The commission the product pays relative to alternatives
• c.The customer's credit score and employment history alone
• d.The customer's age, financial situation, tax status, investment objectives, time horizon, liquidity needs, and risk tolerance✓

Suitability and best-interest obligations require the representative to gather and evaluate the customer's full investment profile before recommending a product. Compensation to the representative is a conflict to be managed, not a basis for a recommendation. Recent performance alone says nothing about whether the product fits this investor's needs.FINRA Rules

A 72-year-old retiree needs to draw income from a $60,000 lump sum within the next 12 months 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 money market fund
• c.A short-term bond fund chosen for its stability and quick access to principal within a year
• d.A conservative balanced fund with a small equity allocation suited to a multi-year investment horizon

Locking the customer's only liquid money into a contract with a long surrender period directly conflicts with a one-year liquidity need and would likely trigger surrender charges. The other choices keep the money accessible with varying degrees of price risk. Liquidity needs and time horizon are central suitability factors, especially for older investors.FINRA Rules

A 28-year-old contributing monthly to an IRA states that the goal is maximum long-term growth and that no withdrawals are planned for 30 years. The most appropriate recommendation is:

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

A three-decade horizon and a growth objective favor equities, whose higher expected return compensates for interim volatility. Short-term Treasuries and money market funds are unlikely to outpace inflation over 30 years, exposing the investor to purchasing power risk. Municipal bonds are inappropriate inside an IRA because the tax exemption is wasted in a tax-deferred account.FINRA Rules

A customer wants to park six months of living expenses where the money is safe and available on short notice. Which fund best matches that objective?

• 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 same-day or next-day liquidity, which fits an emergency reserve. High-yield bonds carry substantial credit risk and growth funds substantial market risk. Long-term government bonds have little credit risk but significant interest rate risk, so their value can fall when the money is needed.FINRA Rules

Which statement about the new account form for a retail cash account is correct?

• a.The form must be filed with FINRA before the first trade is executed in the customer's newly opened account
• b.Only the customer's signature is required, not a principal's review and approval of the new account
• c.The customer's signature is not required, but the form must be approved by a principal of the firm✓
• d.The customer must sign the form before any trade may be entered in the customer's newly opened retail cash account

For a standard cash account, the registered representative completes the form and a principal accepts the account; the customer's signature is not a regulatory requirement, although firms often collect one. Customer signatures are required for margin agreements, discretionary authority, and options accounts. New account forms are maintained at the firm, not filed with FINRA.FINRA Rules

A representative learns that an individual account holder has died. The representative should:

• a.Transfer the assets to the named beneficiary the same day
• b.Continue accepting instructions from the customer's spouse
• c.Liquidate all positions immediately to protect the estate
• d.Cancel all open orders, mark the account deceased, and await required documents such as a death certificate and letters testamentary✓

On notice of death the firm freezes the account, cancels open orders, and takes instructions only from the duly appointed representative of the estate after receiving proper documentation. Family members have no authority merely by relationship. Liquidating or transferring assets before documentation could expose the firm and the representative to liability.FINRA Rules

When a customer submits a transfer instruction to move an account from one broker-dealer to another through the automated transfer system, the carrying firm must:

• a.Validate or take exception to the instruction within one business day and complete the transfer within three business days of validation✓
• b.Obtain approval from FINRA before releasing the assets
• c.Liquidate all positions and transfer cash only
• d.Complete the transfer within 30 calendar days

The automated customer account transfer process runs on a tight schedule: validation within one business day, then completion within three business days. Assets transfer in kind whenever the receiving firm can hold them, so wholesale liquidation is incorrect. FINRA sets the timeframes but does not approve individual transfers.FINRA Rules

A firm must send the customer a copy of the account record for verification of the customer's investment profile information:

• a.Only when the account is closed, at which point the firm mails a final verification of the client's profile
• b.Within 30 days of opening the account and at least once every 36 months thereafter✓
• c.Only when the customer requests it in writing through the branch office each calendar year
• d.Every 12 months without exception regardless of whether any profile information has actually changed

SEC books and records rules require an initial verification copy within 30 days of account opening and a refresh at least every 36 months so the profile stays current. The firm must also update records when it learns of a material change, such as a new address or a change in objectives. Waiting for a customer request or for account closing would leave stale information in place.Securities Exchange Act of 1934

An investor bought fund shares four months ago and now receives a capital gains distribution from the fund. How is that distribution taxed?

• a.As a short-term gain, because the investor held the shares less than one year at the time of the capital gains distribution
• b.As a long-term capital gain, regardless of how long the investor held the shares✓
• c.It is not taxable until the shares are sold
• d.As ordinary income, because all fund distributions are ordinary income that are paid out to the investor

Capital gains distributions passed through by a fund are always reported as long-term because the fund's own holding period governs, not the shareholder's. The shareholder's holding period matters only when the shareholder sells the fund shares. Distributions are taxable in the year received even if automatically reinvested.Internal Revenue Code

Qualified dividends distributed by an equity mutual fund to a taxable account are generally taxed:

• a.Not at all, because the fund already paid tax on them at the corporate level before passing them through to shareholders
• b.At the lower long-term capital gains rates, if the applicable holding period requirements are met✓
• c.At the investor's ordinary income rate in all cases, exactly as ordinary short-term trading profits are taxed
• d.Only when the investor eventually sells the fund shares

Dividends that meet the qualified dividend requirements receive the favorable long-term capital gains rates rather than ordinary income treatment. Non-qualified dividends, including most interest income passed through by bond funds, are taxed as ordinary income. A regulated investment company generally pays no entity-level tax on distributed income, so the shareholder is the taxpayer.Internal Revenue Code

A fund makes a distribution characterized as a return of capital. The immediate effect on the shareholder is:

• a.An increase in the shareholder's cost basis
• b.Ordinary income tax on the full amount
• c.A long-term capital gain equal to the distribution, reportable by the shareholder in the current tax year
• d.A reduction in the shareholder's cost basis, with no current tax✓

A return of capital is the investor's own money coming back, so it is not currently taxable but it lowers basis, which increases the taxable gain on a later sale. Once basis reaches zero, further return of capital distributions become taxable gain. Treating it as income or as a current capital gain double counts the tax.Internal Revenue Code

An investor automatically reinvests $3,000 of taxable fund distributions over several years. The effect on cost basis is that basis:

• a.Is irrelevant, since reinvested shares are always tax free when sold
• b.Stays the same, because no new money was added from outside the account
• c.Increases by the $3,000, because the distributions were already taxed✓
• d.Decreases by the $3,000

Reinvested distributions are taxed in the year received, so adding them to basis prevents the same dollars from being taxed again when the shares are sold. Failing to track reinvestments is a common cause of investors overstating their taxable gain. Basis decreases only for return of capital distributions.Internal Revenue Code

An investor sells fund shares at a $4,000 loss on March 10 and buys shares of the same fund on March 25. The result is:

• a.The loss is disallowed under the wash sale rule and is added to the basis of the newly purchased shares✓
• b.Only half the loss is deductible
• c.The loss is permanently forfeited and can never be added to the cost basis of any replacement shares purchased later
• d.The full $4,000 loss is deductible in the current year despite the repurchase of the identical fund shares within days

Repurchasing a substantially identical security within 30 days before or after the sale triggers the wash sale rule, deferring the loss rather than eliminating it. The disallowed amount is added to the basis of the replacement shares, so the benefit is recovered on a later sale. Waiting 31 days would have preserved the current deduction.Internal Revenue Code

Which cost basis method applies to mutual fund shares if the shareholder makes no election?

• a.Last in, first out
• b.Average cost, single category
• c.Specific identification of the highest-cost shares
• d.First in, first out✓

Absent an election, the IRS default for securities including mutual fund shares is first in, first out, which sells the oldest shares first. Shareholders may instead identify specific shares at the time of sale or, for fund shares, elect an average cost method through the fund. LIFO is not an available basis method for these shares.Internal Revenue Code

An investor exchanges shares of a growth fund for shares of a bond fund within the same fund family at net asset value. For tax purposes, this exchange is:

• a.Taxable only if the exchange occurs within one year of purchase of the original growth fund shares
• b.Tax free, because no sales charge was paid
• c.Tax free, because the money never left the fund family
• d.A taxable event, treated as a sale of the growth fund and a purchase of the bond fund✓

An exchange privilege waives the sales charge but does not change the tax character of the transaction: the investor has disposed of one security and acquired another, so any gain or loss is recognized. This is a frequent source of surprise tax bills for customers and should be disclosed before the exchange. Timing affects only whether the gain is short or long term.Internal Revenue Code

A shareholder of a municipal bond fund receives $900 of income distributions and a $500 capital gains distribution. The federal tax treatment is:

• a.The income is taxable and the capital gain is exempt
• b.Both amounts are exempt from federal income tax
• c.The income distribution is generally exempt from federal income tax, while the capital gains distribution is taxable✓
• d.Both amounts are fully taxable as ordinary income

Interest passed through from municipal bonds keeps its federal tax-exempt character, but gains the fund realizes from selling bonds are taxable capital gains. Investors often assume a municipal fund is entirely tax free, which is why this distinction matters. Certain private activity bond income may also be subject to the alternative minimum tax.Internal Revenue Code

Withdrawals of earnings from a non-qualified annuity before annuitization are taxed:

• a.As long-term capital gains at the favorable rate that applies to securities held over a year
• b.Only when the contract is fully surrendered and never on a partial withdrawal of earnings
• c.On a first-in, first-out basis, so principal comes out first, meaning contributions are recovered before any earnings
• d.As ordinary income on a last-in, first-out basis, so earnings come out first✓

Non-qualified annuities use LIFO ordering, meaning the taxable earnings are deemed withdrawn before the after-tax principal, and they are taxed at ordinary rates. Annuity gains never receive capital gains treatment because the growth was tax deferred, not invested in a taxable capital asset. Partial withdrawals are taxable when taken, not only at full surrender.Internal Revenue Code

A variable annuity purchased inside a Traditional IRA with fully deductible contributions is distributed at age 65. The distribution is:

• a.Taxable only on the earnings portion
• b.Entirely tax free because annuities are tax favored when held to at least age 65 inside a retirement account
• c.Fully taxable as ordinary income, because there is no after-tax cost basis✓
• d.Taxed at long-term capital gains rates on the growth above the original contributions

When every dollar went in pre-tax, the contract has no basis, so the entire distribution is ordinary income. An exclusion ratio applies only to non-qualified contracts funded with after-tax money. The tax-deferred wrapper never converts ordinary income into capital gains.Internal Revenue Code

An investor dies owning fund shares purchased for $20,000 that are worth $50,000 on the date of death. The heir's cost basis is generally:

• a.$35,000, the average of cost and market value, as the tax rules require for property received from a decedent
• b.Zero, because inherited property has no basis
• c.$20,000, the decedent's original cost
• d.$50,000, the fair market value at the date of death✓

Inherited property generally receives a stepped-up basis equal to its date-of-death fair market value, wiping out the unrealized appreciation for income tax purposes. Carrying over the decedent's cost or using an average has no basis in the tax rules. Gifted property during life, by contrast, generally carries over the donor's basis.Internal Revenue Code

A donor wants to make a large lump-sum contribution to a 529 plan without using lifetime gift tax exemption. Which feature helps?

• a.Contributions are deductible on the federal return
• b.529 contributions are never treated as gifts
• c.A special election allows the contribution to be spread over five years for annual gift tax exclusion purposes✓
• d.The annual exclusion does not apply to contributions for grandchildren made to the plan for grandchildren as named beneficiaries

529 plans permit front-loading a contribution and electing to treat it as if made ratably over five years, letting the donor apply five years of annual exclusions at once. Contributions are completed gifts, so saying they are never gifts is wrong. There is no federal deduction for 529 contributions, though many states offer one, and the annual exclusion applies to any donee.Internal Revenue Code Section 529

A retiree holds only long-term certificates of deposit and a money market fund. The greatest risk to this portfolio over a 25-year retirement is:

• a.Credit risk on federally insured deposits held at the federally insured issuing bank
• b.Currency risk from foreign exchange movements affecting the domestic certificates of deposit
• c.Prepayment risk on the money market fund as its holdings are refinanced early
• d.Purchasing power risk, because returns may not keep pace with inflation✓

Very low-volatility instruments protect principal but historically deliver little real return, so inflation erodes the portfolio's buying power over a long retirement. Insured deposits carry minimal credit risk, and a domestic portfolio has no meaningful currency exposure. Prepayment risk applies to mortgage-backed securities rather than to money market funds generally.

Which type of risk cannot be reduced by holding a widely diversified equity mutual fund?

• a.Systematic risk, also called market risk✓
• b.Business risk of an individual company, which persists no matter how many holdings the fund adds to the portfolio
• c.Single-issuer default risk
• d.Industry concentration risk, a risk that broad diversification is powerless to remove

Diversification eliminates risks specific to a company or industry, but a broad market decline affects nearly all equities at once, so systematic risk remains. That is precisely why diversified funds still lose value in bear markets. The other three are unsystematic risks that spreading holdings across issuers and sectors addresses.

The dominant risk in a high-yield corporate bond fund compared with a Treasury fund is:

• a.Currency risk, arising from foreign-exchange swings on the fund's overseas bond holdings
• b.Legislative risk, the chance that new tax laws erase the interest advantage of the bonds
• c.Credit risk, the possibility that issuers default or are downgraded✓
• d.Reinvestment risk, the risk that maturing coupons must be reinvested at lower prevailing rates

High-yield issuers have weaker balance sheets, so default and downgrade risk drives their price behavior and explains the higher yield. Treasuries carry essentially no credit risk. Reinvestment, legislative, and currency risks exist in various portfolios but do not distinguish high-yield from Treasury funds.

Interest rates rise sharply. Which fund would most likely experience the largest price decline?

• a.A money market fund holding only overnight government paper that reprices almost constantly
• b.A floating rate bank loan fund whose coupons reset upward as rates climb, cushioning its price
• c.A short-term bond fund with a two-year average maturity, whose modest two-year duration limits its sensitivity to rate moves
• d.A long-term government bond fund with a 20-year average maturity✓

Interest rate risk grows with maturity and duration, so the longest-maturity portfolio suffers the largest price drop when yields rise. Money market and short-term bond funds reprice quickly and move very little. Floating rate instruments adjust their coupons upward, which cushions their prices.

A customer will need a down payment for a home purchase in 14 months. The appropriate primary investment objective is:

• a.Tax-advantaged long-term growth, pursued through a tax-deferred retirement account
• b.Preservation of capital and liquidity✓
• c.Aggressive capital appreciation sought through a portfolio of aggressive growth stocks
• d.Speculation using sector funds

A known expense within roughly a year rules out volatility, because a decline just before the purchase cannot be recovered in time. Growth and speculation both accept short-term losses in exchange for long-run returns the customer will never realize. Time horizon is the controlling suitability factor here.

A customer in a high federal tax bracket wants current income in a taxable account and is comfortable with moderate interest rate risk. Which recommendation best fits?

• a.A municipal bond fund, whose income is generally exempt from federal income tax✓
• b.A money market fund
• c.A growth fund that pays no dividends
• d.A high-yield corporate bond fund inside an IRA

Tax-exempt interest is worth the most to investors in high brackets, so a municipal bond fund can deliver a better after-tax yield than a comparable taxable fund. A growth fund does not provide current income, and a money market fund provides income but with minimal yield and no tax advantage. Placing a taxable high-yield fund in an IRA does not address a customer who wants income in a taxable account now.Internal Revenue Code

The combination privilege offered by many fund families allows an investor to:

• a.Exchange one fund for another in the family without recognizing a taxable gain event at the fund's net asset value
• b.Add together simultaneous purchases of two or more funds in the same family to reach a breakpoint✓
• c.Combine purchases made in unrelated fund families to reach a breakpoint threshold across separate and unrelated fund sponsors
• d.Redeem shares at net asset value without any deferred sales charge

The combination privilege lets an investor aggregate concurrent investments across different funds in the same family so the total qualifies for a quantity discount. The trap is confusing it with the exchange (conversion) privilege, which moves money between funds at NAV but is a taxable event. Purchases in unrelated families never combine, and redemption charges are a separate matter.FINRA Rule 2341 (Investment Company Securities)

An investor uses a fund family's exchange (conversion) privilege to move from a growth fund into a bond fund at net asset value. The correct statement is:

• a.No new sales charge applies, but the exchange is a taxable sale of the growth fund and purchase of the bond fund✓
• b.The exchange is completely tax free because it stays within the family of funds offered under a single sponsor's umbrella arrangement
• c.A full front-end sales charge must be paid on the bond fund
• d.The exchange is tax free only if completed within 30 days

The exchange privilege waives an additional sales charge but does not change the tax law: the investor has disposed of one security and acquired another, so gain or loss is recognized. The common misconception is that staying inside the family makes it tax free. Representatives should warn customers of the tax consequence before an exchange.Internal Revenue Code

Dollar cost averaging involves investing a fixed dollar amount at regular intervals. Its principal effect is that:

• a.It guarantees the investor a profit over time
• b.More shares are bought when prices are low and fewer when prices are high, producing an average cost per share below the average price paid✓
• c.It eliminates market risk entirely
• d.The investor buys the same number of shares each period

Because a fixed dollar amount buys more shares at low prices and fewer at high prices, the mathematical result is an average cost per share lower than the simple average of the prices paid. Dollar cost averaging does not guarantee a profit or remove market risk; a sustained decline still produces a loss. A fixed dollar amount, not a fixed share count, is the defining feature.

A fund's sales charge schedule is: under $25,000 = 5.0%; $25,000 to $49,999 = 4.25%; $50,000 to $99,999 = 3.5%. A customer invests $40,000. What sales charge applies?

• a.5.0%, or $2,000
• b.4.25%, or $1,700✓
• c.3.5%, or $1,400
• d.No sales charge, because $40,000 exceeds the first breakpoint

A $40,000 purchase falls in the $25,000 to $49,999 tier, so the rate is 4.25%: $40,000 x 0.0425 = $1,700. Applying the first-tier 5% ($2,000) ignores that the breakpoint at $25,000 already reduced the rate, and using 3.5% would require reaching $50,000. Crossing a breakpoint lowers the charge but never eliminates it.FINRA Rule 2341 (Investment Company Securities)

A customer already owns fund shares now worth $46,000 and invests an additional $9,000. The fund's first breakpoint is at $50,000. Under rights of accumulation, the new purchase:

• a.Receives no breakpoint because the $9,000 purchase alone is below $50,000 in total new contribution value
• b.Qualifies only if the customer signs a letter of intent
• c.Qualifies for the reduced sales charge, because current holdings plus the new purchase exceed $50,000✓
• d.Reduces the sales charge only on the amount above the breakpoint

Rights of accumulation add the current value of existing holdings ($46,000) to the new purchase ($9,000) for a combined $55,000, which clears the $50,000 breakpoint, so the reduced charge applies to the new money. It is a mistake to look only at the new purchase in isolation. A letter of intent is a separate, forward-looking way to reach a breakpoint and is not required here.FINRA Rule 2341 (Investment Company Securities)

A customer invests $12,000 in a fund whose public offering price is $30.00 per share. Ignoring fractional-share rounding, how many shares are purchased?

• a.360 shares
• b.400 shares✓
• c.40 shares
• d.1,200 shares

Shares acquired equal the dollars invested divided by the public offering price, because the investor pays the POP (NAV plus sales charge): $12,000 / $30.00 = 400 shares. Dividing by ten or multiplying instead of dividing produces the other figures. The sales charge is already embedded in the POP, so no separate adjustment is needed.

Which statement best describes an exchange-traded fund (ETF)?

• a.It is a registered fund whose shares trade throughout the day on an exchange at market-determined prices, usually near NAV✓
• b.It is redeemed directly with the fund at NAV by any retail investor, like an open-end fund
• c.It guarantees investors the exact return of the underlying index
• d.It is prohibited from being purchased by retail investors

An ETF trades intraday on an exchange like a stock, and an arbitrage mechanism keeps its price close to net asset value. Unlike an open-end fund, a retail investor buys and sells ETF shares in the secondary market rather than redeeming with the fund; only authorized participants redeem in large creation units. ETFs track but do not guarantee an index and are freely available to retail investors.Investment Company Act of 1940

Which statement about a money market mutual fund is generally correct?

• a.It guarantees a return of principal backed by FDIC insurance
• b.Its shares trade on an exchange at a premium or discount to NAV
• c.It seeks to maintain a stable net asset value, typically $1.00 per share, and is usually sold with no sales charge✓
• d.It invests primarily in long-term corporate bonds to maximize yield

A money market fund invests in short-term, high-quality instruments and aims to hold a stable $1.00 NAV, and most are no-load. The classic trap is thinking money funds are FDIC insured; they are securities and can, in rare cases, lose value. They are open-end funds redeemed at NAV, not exchange-traded, and they hold short-term, not long-term, paper.

An investor whose primary objective is current income with relative stability of principal would be best matched with:

• a.An aggressive growth fund
• b.A bond (fixed-income) fund✓
• c.A sector fund concentrated in a single industry
• d.A fund that reinvests all earnings and pays no distributions

A bond fund is built to generate a steady stream of interest income with lower principal volatility than equities, matching an income objective. Growth and sector funds pursue capital appreciation and carry more price risk, and a fund that pays no distributions provides no current income at all. Objective must drive the fund selection.

A key characteristic of an index fund is that it:

• a.Attempts to outperform its benchmark through active stock selection through the portfolio manager's continual active stock selection and market timing
• b.Charges the highest management fees among fund types
• c.Is always structured as a closed-end fund
• d.Seeks to replicate the performance of a market index and typically has low expenses and low portfolio turnover✓

An index fund passively mirrors a benchmark, which keeps trading, research, and management costs low. Active outperformance and high fees describe actively managed funds, the opposite approach. Index funds are commonly open-end funds or ETFs, not necessarily closed-end funds.

The mortality and expense risk (M&E) charge in a variable annuity compensates the insurer for:

• a.Guaranteeing the death benefit and the annuity payout rate, and bearing the risk that expenses exceed the contract's guaranteed maximum✓
• b.The commission paid to the selling representative only
• c.The securities transaction costs inside the subaccounts
• d.The state premium tax on the contract

The M&E charge covers the insurer's mortality guarantees, such as the death benefit and the promise to pay for life at the guaranteed rate, plus the risk that its expenses run higher than the contract's ceiling. It is not simply the sales commission, nor the subaccounts' internal trading costs, nor state premium tax, which are separate items. M&E is a recurring asset-based charge disclosed in the prospectus.

During the accumulation phase of a typical variable annuity, the standard death benefit pays the beneficiary:

• a.The total of all future annuity payments the owner would have received under the contract's settlement option
• b.The greater of the current account value or total purchase payments made, less any withdrawals✓
• c.A fixed amount set by the state insurance department
• d.Nothing, because death benefits apply only after annuitization

The common variable annuity death benefit guarantees the beneficiary at least the money paid in (net of withdrawals) even if the separate account has fallen, or the account value if it is higher. It is not a projection of future payments, nor a state-set figure, and the benefit applies during the accumulation phase. Enhanced death benefit riders can raise this floor for an added fee.

A guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity:

• a.Guarantees that the separate account itself will never lose value
• b.Allows the owner to withdraw a specified minimum amount each year regardless of separate account performance, usually for an additional fee✓
• c.Eliminates all surrender charges on the contract
• d.Automatically converts the variable annuity into a fixed annuity

A GMWB guarantees a stream of withdrawals up to a stated amount even if poor performance would otherwise deplete the account, and the insurer charges an extra fee for the guarantee. It protects the withdrawal stream, not the account value itself, so the subaccounts can still decline. It neither waives surrender charges nor changes the contract into a fixed annuity.

A representative recommends that a customer surrender an existing variable annuity to buy a new 'bonus' annuity that credits an extra 4% to the initial premium. The primary suitability concern is that:

• a.Bonus annuities are illegal
• b.The bonus is immediately taxable as ordinary income
• c.The new contract may carry higher ongoing fees and a fresh, longer surrender period that outweigh the bonus, while the surrender may trigger charges on the old contract✓
• d.A 1035 exchange cannot be used for the transaction

Bonus annuities typically recover the credited bonus through higher M&E fees and a new multi-year surrender schedule, so the headline bonus can cost the customer more than it delivers, and surrendering the old contract may impose its own charges. Bonus annuities are legal, the transaction can qualify as a 1035 exchange, and the bonus is not immediately taxed. This is a classic unsuitable-switch red flag.FINRA Rules

The value of one accumulation unit in a variable annuity separate account is determined by:

• a.Dividing the net asset value of the separate account by the number of accumulation units outstanding✓
• b.The assumed interest rate stated in the contract
• c.The performance of the insurer's general account
• d.A fixed schedule printed in the prospectus at issue and left completely unchanged for the entire life of the contract

An accumulation unit works like a mutual fund share: its value is the separate account's net assets divided by the units outstanding, so it moves with subaccount performance. The AIR is used only in the payout phase to price annuity units, not accumulation units. The general account backs fixed guarantees, and the unit value is not fixed.Investment Company Act of 1940

An owner of a non-qualified variable annuity dies and leaves the contract to a beneficiary. Compared with inheriting appreciated mutual fund shares, the annuity:

• a.Also receives a full step-up in basis to date-of-death value, precisely as inherited appreciated mutual fund shares receive
• b.Passes entirely income-tax free to the beneficiary
• c.Is taxed to the beneficiary at long-term capital gains rates on the appreciation above the owner's original cost basis
• d.Does not receive a stepped-up basis; the gain above cost basis is taxed to the beneficiary as ordinary income✓

Annuity gains are tax-deferred ordinary income and do not qualify for a step-up at death, so the beneficiary pays ordinary income tax on the amount exceeding the owner's cost basis. Inherited appreciated stock or fund shares, by contrast, generally get a basis step-up that erases the gain. The annuity wrapper never converts that gain into capital gains treatment.Internal Revenue Code

A distinctive feature of variable life insurance compared with a variable annuity is that variable life:

• a.Provides no death benefit, paying only the accumulated cash value to the estate at death
• b.Allows the policyowner to borrow against the policy's cash value through a policy loan✓
• c.Is not considered a security and therefore requires no prospectus or securities registration
• d.Guarantees that the cash value will grow each year regardless of the separate account's investment performance

Variable life builds a cash value the owner can access through policy loans, a feature annuities do not offer in the same way. Variable life provides a guaranteed minimum death benefit and, like variable annuities, is a security requiring securities registration to sell. Its cash value rides on separate account performance and is not guaranteed to grow.

Compared with a scheduled (fixed) premium variable life policy, a variable universal life (VUL) policy generally offers:

• a.Flexible premium payments and an adjustable death benefit within policy limits✓
• b.A fully guaranteed cash value
• c.No exposure to separate account investment risk because premiums are swept into the insurer's general account
• d.Premiums that can never be changed once set, unlike a scheduled-premium variable life policy

VUL combines the investment flexibility of variable life with the premium and death-benefit flexibility of universal life, letting the owner vary payments and adjust coverage within limits. Its cash value is still tied to the separate account and is not guaranteed. A scheduled premium policy, by contrast, requires fixed, level premiums.

An open-end investment company share is called a redeemable security because:

• a.It can be resold to other investors on a stock exchange
• b.The issuing fund stands ready to buy the share back from the investor at its next computed net asset value✓
• c.It may be redeemed only at a fixed price stated in the prospectus
• d.The investor may return it for a full refund of the sales charge at any time at any time following the original date of purchase

A redeemable security is one the issuer will repurchase; an open-end fund continuously redeems its shares at the next-computed NAV under forward pricing. Selling to other investors on an exchange describes closed-end funds and ETFs. The redemption price is NAV, which floats, not a fixed figure, and the sales charge is not refunded on redemption.Investment Company Act of 1940

Under the Investment Company Act of 1940, a fund's investment advisory contract must be:

• a.Approved once and then continue automatically for the life of the fund
• b.Approved only by the fund's investment adviser
• c.Approved initially by shareholders and the board, then renewed at least annually by the board, including a majority of the independent (non-interested) directors✓
• d.Filed with and approved by the Federal Reserve

The Act ties the adviser's compensation to periodic review: the contract needs initial shareholder and board approval and then annual renewal by the board, specifically a majority of the non-interested directors. It does not renew automatically, cannot be approved by the adviser alone, and is not subject to Federal Reserve approval. This annual review protects shareholders from excessive fees.Investment Company Act of 1940

The Investment Company Act of 1940 generally prohibits an affiliated person of a fund, such as its investment adviser, from:

• a.Selling securities to, or buying securities from, the fund for the affiliate's own account✓
• b.Voting the fund shares the affiliate personally owns at the annual shareholder meeting alongside other investors
• c.Receiving any advisory fee
• d.Attending the fund's board meetings even when the adviser holds an interested-person seat on the board

To prevent self-dealing, the Act bars affiliated persons from principal transactions with the fund, such as selling securities to it or buying securities from it for their own account. Affiliates may still vote shares they own, attend board meetings, and receive contractually approved advisory fees. The prohibition targets conflicts that could harm shareholders, not ordinary governance.Investment Company Act of 1940

A mutual fund's 12b-1 distribution plan must be:

• a.Approved by the SEC each year before it may be used
• b.Approved initially and renewed at least annually by the board, including a majority of the non-interested directors, and may be terminated by those directors or by a vote of the outstanding shares✓
• c.Guaranteed to increase the fund's performance
• d.Unlimited in the amount it may charge shareholders

A 12b-1 plan is a governance matter: it needs board approval, annual renewal by a board that includes a majority of independent directors, and it can be ended by those directors or by shareholders. The SEC does not annually approve individual plans, no plan can guarantee performance, and FINRA caps 12b-1 charges. Ongoing independent oversight is the safeguard.Investment Company Act of 1940

Under Regulation Best Interest (Reg BI), a broker-dealer making a securities recommendation to a retail customer must satisfy four component obligations. They are:

• a.Suitability, Diversification, Liquidity, and Disclosure
• b.Registration, Reporting, Recordkeeping, and Renewal
• c.Know-Your-Customer, Anti-Money-Laundering, Privacy, and Advertising
• d.Disclosure, Care, Conflict of Interest, and Compliance✓

Reg BI, effective since June 2020, requires firms to act in the retail customer's best interest through four obligations: Disclosure, Care, Conflict of Interest, and Compliance. It raised the standard above the older suitability rule, so listing suitability as one of the four is outdated. The other choices mix in unrelated regulatory concepts.Regulation Best Interest

Form CRS (the Customer or Client Relationship Summary) must be:

• a.Filed with FINRA within ten days after each recommendation
• b.Delivered to retail investors and summarize the firm's services, fees, conflicts of interest, standard of conduct, and disciplinary history✓
• c.Signed by a principal before every trade
• d.Prepared only for institutional clients

Form CRS is a short relationship summary given to retail investors that plainly describes the firm's services, fees, conflicts, legal standard of conduct, and whether the firm or its people have disciplinary history. It is a disclosure delivered at the start of the relationship, not a per-trade filing or approval, and it is aimed at retail, not institutional, clients.Regulation Best Interest

FINRA's gift rule generally limits gifts given to another person in connection with that person's business to a maximum of:

• a.$300 per person per year✓
• b.$500 per person per year
• c.$1,000 per person per year
• d.No limit, as long as the gift is disclosed

Effective March 30, 2026, FINRA raised the Rule 3220 gift limit from its long-standing $100 to $300 per recipient per year for gifts tied to the business of the recipient's employer; the increase reflects inflation since the rule's 1992 adoption. The former $100 amount applied before 2026. Ordinary business entertainment and certain personal gifts are treated separately, and disclosure does not raise the ceiling.FINRA Rule 3220 (Gifts and Gratuities)

A registered representative wants to sell a private investment away from the firm and be compensated for it. Before participating, the representative must:

• a.Simply keep a record of the transaction in a personal file for the representative's own later reference
• b.Provide written notice to the employing firm and receive the firm's written approval✓
• c.Obtain only the customer's verbal consent
• d.Wait until after the deal closes to inform the firm

Participating in a securities transaction outside the firm for compensation, known as selling away, requires prior written notice to the firm and the firm's written approval, after which the firm supervises the activity as its own. A personal file, verbal customer consent, or after-the-fact notice all fail the rule. Unapproved selling away is a serious violation.FINRA Rule 3280 (Private Securities Transactions)

A registered representative takes a paid weekend job as a real estate agent. Regarding this outside business activity, the representative must:

• a.Do nothing, because it is unrelated to securities, since real estate licensing falls entirely outside FINRA's jurisdiction
• b.Obtain SEC approval before starting, filing a Form U4 amendment with the Commission for its clearance
• c.Provide prior written notice to the employing member firm✓
• d.Resign the securities registration

Any outside business activity for compensation requires prior written notice to the employing firm so it can assess conflicts and supervisory concerns, even when the work has nothing to do with securities. The SEC does not approve individual outside jobs, and the representative need not resign; the firm may impose conditions or object. Silence is the violation.FINRA Rule 3270 (Outside Business Activities)

A representative wants to borrow $5,000 from a customer who is neither a family member nor a financial institution. Under FINRA rules, this loan is:

• a.Generally prohibited unless it fits a narrow permitted category and the firm's written procedures allow and approve it✓
• b.Always permitted if repaid within 30 days
• c.Permitted as long as the interest rate is at market
• d.Permitted with the branch manager's verbal approval

Borrowing from or lending to customers is generally prohibited unless the arrangement falls within limited exceptions, such as certain family or lending-institution relationships, and the firm's written procedures permit it with proper notice and approval. A quick repayment, a market interest rate, or verbal approval does not cure the conflict. The rule protects customers from exploitation.FINRA Rule 3240 (Borrowing From or Lending to Customers)

A summary prospectus for a mutual fund:

• a.May be used only with institutional investors
• b.Is a short document that can satisfy prospectus delivery if the full statutory prospectus is available online and provided on request✓
• c.Eliminates the need for any prospectus whatsoever
• d.Must be filed with the MSRB

The summary prospectus gives investors the key facts, such as objectives, fees, risks, and performance, in a few pages, and delivering it satisfies the prospectus requirement provided the full statutory prospectus is posted online and sent on request. It supplements rather than eliminates the statutory prospectus and is used with retail investors. Mutual fund filings go to the SEC, not the MSRB.Securities Act of 1933

In the money laundering process, the stage at which illicit cash is first introduced into the financial system, for example through cash deposits, is called:

• a.Integration
• b.Placement✓
• c.Layering
• d.Reconciliation

Placement is the entry point, where dirty cash first enters the financial system. Layering then moves the funds through complex transactions to obscure their origin, and integration returns them to the economy looking legitimate. Structuring deposits just under the $10,000 reporting threshold is a placement tactic firms must watch for; 'reconciliation' is not an AML stage.Bank Secrecy Act

The Securities Investor Protection Corporation (SIPC) protects a customer when:

• a.The customer's mutual fund declines in value
• b.The overall market falls into a bear market
• c.A member broker-dealer fails and customer cash and securities are missing, up to $500,000 including a $250,000 limit for cash✓
• d.The customer is defrauded by a private individual outside any brokerage

SIPC steps in when a member broker-dealer becomes insolvent and customer property is missing, covering up to $500,000 per customer with a $250,000 sublimit for cash. It does not insure against market losses; a fund that simply drops in value is not a SIPC event. Fraud unconnected to a failed member firm is outside SIPC's scope.Securities Investor Protection Act

ERISA, which governs private-sector employer retirement plans, requires that such plans:

• a.Invest exclusively in the employer's own stock, concentrating each participant's retirement savings in a single company's securities
• b.Follow fiduciary standards and minimum participation, vesting, and funding rules to protect plan participants✓
• c.Be offered to government and church employees, the two groups ERISA was specifically written to cover
• d.Guarantee participants a fixed rate of return on their account balances each year regardless of plan investment results

ERISA imposes fiduciary duties and sets minimum eligibility, vesting, and funding standards so participants' benefits are protected and prudently managed. Concentrating a plan entirely in employer stock would violate diversification and prudence duties. Government and church plans are generally exempt from ERISA, and defined contribution plans do not guarantee a return.ERISA

An ABLE account allows tax-advantaged saving for:

• a.Qualified disability expenses of a beneficiary who became disabled before a specified age, with interests treated as municipal fund securities like a 529 plan✓
• b.Any adult's general retirement, with no disability requirement
• c.College tuition only, with no other qualified uses
• d.Short-term trading in individual stocks

ABLE accounts let eligible individuals with disabilities save for qualified disability expenses without losing means-tested benefits, and like 529 college plans their interests are municipal fund securities under MSRB oversight. Eligibility requires the disability to have begun before a specified age. They are not general retirement accounts, are not limited to tuition, and are not trading accounts.Internal Revenue Code Section 529A

A SIMPLE IRA is designed for:

• a.Large corporations with thousands of employees
• b.Government agencies exclusively
• c.Individuals who have no earned income
• d.Small employers, generally those with 100 or fewer employees, funded by employee salary reduction plus an employer contribution✓

A SIMPLE IRA serves small businesses, generally with 100 or fewer employees, combining employee salary-deferral contributions with a required employer match or non-elective contribution. Large employers typically use 401(k) plans, government workers use plans like the TSP or 457, and earned income is required to contribute. SIMPLE plans keep administration light for small firms.Internal Revenue Code

A Coverdell Education Savings Account (ESA) differs from a 529 plan in that the Coverdell:

• a.Has no contribution limit
• b.Has a relatively low annual contribution limit and income-based eligibility phaseouts, though earnings used for qualified education expenses are tax free✓
• c.Is a municipal fund security regulated by the MSRB
• d.Allows unlimited contributions regardless of the beneficiary's age

A Coverdell ESA offers tax-free growth for qualified education expenses but caps annual contributions at a low amount and phases out eligibility at higher incomes, unlike a 529 plan's high limits and no income test. The 529 plan, not the Coverdell, is the municipal fund security. Coverdell contributions also generally must stop once the beneficiary reaches a set age.Internal Revenue Code

A recession is commonly identified by:

• a.A decline in real gross domestic product over two consecutive quarters✓
• b.A single month of rising unemployment reported by the Bureau of Labor Statistics
• c.Any increase in interest rates by the Federal Reserve during a single monthly reporting period
• d.A one-day drop in the stock market of several percentage points in the major indexes

The widely used rule of thumb defines a recession as two consecutive quarters of falling real GDP, reflecting a broad, sustained contraction. A single month of higher unemployment, a rate increase, or a one-day market drop is too brief or narrow to signal a recession. Understanding the business cycle helps match investments to economic conditions.

Monetary policy in the United States is conducted by the Federal Reserve primarily through:

• a.Setting federal income tax rates for both individuals and corporations each year
• b.Open market operations, the discount rate, and reserve requirements✓
• c.Approving the federal budget
• d.Deciding the level of government spending on programs, which the Federal Reserve directs each fiscal year

The Federal Reserve manages the money supply and short-term rates using open market operations, the discount rate, and reserve requirements. Tax rates, the federal budget, and spending levels are fiscal policy tools set by Congress and the President, not the Fed. Distinguishing monetary from fiscal policy is a common exam point.

When market interest rates rise, the prices of existing fixed-rate bonds held by a bond fund generally:

• a.Rise, because higher rates increase the bonds' income paid to the current holders of the bonds
• b.Stay the same, because the coupon is fixed for the life of each bond in the portfolio
• c.Fall, because newly issued bonds offer more attractive yields✓
• d.Become exempt from federal income tax once market rates move above the coupon rate

Bond prices move inversely to interest rates: when rates rise, older bonds paying lower fixed coupons become less attractive, so their prices fall until their yields are competitive. The fixed coupon does not protect the market price, and rate changes have nothing to do with tax status. Longer-maturity bonds fall the most when rates rise.

A balanced fund is best described as a fund that:

• a.Invests only in money market instruments to hold its net asset value stable at exactly one dollar per share
• b.Holds a mix of both equity and fixed-income securities to provide a combination of growth and income✓
• c.Invests exclusively in a single industry sector chosen for its long-term growth potential over the market cycle
• d.Guarantees an equal return to every shareholder each year regardless of prevailing market conditions or portfolio holdings

A balanced fund blends stocks and bonds in one portfolio, aiming to deliver growth from equities and income and stability from fixed income. A money market fund and a sector fund pursue very different, narrower objectives. No fund guarantees a return, so the promise of an equal annual return is false.

A variable annuity separate account has net assets of $9,000,000 and 600,000 accumulation units outstanding. The value of one accumulation unit is:

• a.$15.00✓
• b.$6.67
• c.$150.00
• d.$1.50

Accumulation unit value equals the separate account's net assets divided by the units outstanding: $9,000,000 / 600,000 = $15.00. Inverting the division gives $0.067 and misplacing the decimal gives $1.50 or $150.00. The calculation mirrors how a mutual fund computes NAV per share.

An open-end fund has a net asset value of $18.60 per share and a maximum sales charge of 7% of the public offering price. What is the public offering price?

• a.$21.30
• b.$18.60
• c.$19.90
• d.$20.00✓

POP equals NAV divided by (100% minus the sales charge percent): $18.60 / 0.93 = $20.00. Adding 7% to the NAV gives $19.90, the classic error, because the sales charge is a percentage of the offering price, not of NAV (FINRA Rule 2341).

A fund's public offering price is $50.00 and its net asset value is $46.50. What is the sales charge percentage?

• a.6.5%
• b.7.5%
• c.7.0%✓
• d.8.0%

Sales charge % = (POP - NAV) / POP = ($50.00 - $46.50) / $50.00 = $3.50 / $50.00 = 7%. Dividing the $3.50 spread by NAV instead yields about 7.5%, the trap, since the charge is always stated as a percent of the POP (FINRA Rule 2341).

A customer invests $9,000 in a fund whose public offering price is $18.00 per share. Ignoring fractional shares, how many shares are purchased?

• a.450
• b.500✓
• c.540
• d.1,800

Shares = dollars invested / POP, because the investor pays the offering price (NAV plus load): $9,000 / $18.00 = 500 shares. The sales charge is already embedded in the POP, so no separate deduction is made.

A variable annuity separate account has net assets of $24,000,000 and 1,500,000 accumulation units outstanding. What is the value of one accumulation unit?

• a.$62.50
• b.$1.60
• c.$160.00
• d.$16.00✓

Accumulation unit value = separate account net assets / units outstanding = $24,000,000 / 1,500,000 = $16.00, the same conduit math a mutual fund uses for NAV per share (Investment Company Act of 1940).

A fund's public offering price is $25.00 per share and it charges a 5% sales load. What is its net asset value per share?

• a.$20.00
• b.$26.25
• c.$23.81
• d.$23.75✓

NAV = POP x (1 - sales charge %) = $25.00 x 0.95 = $23.75. Dividing $25.00 by 1.05 gives $23.81, a trap, because the 5% load is a percentage of the POP, not of NAV.

A fund's schedule is: under $50,000 = 4.5%; $50,000-$99,999 = 3.5%; $100,000-$249,999 = 2.5%. A customer invests $75,000. What sales charge, in dollars, applies?

• a.$3,375
• b.$1,875
• c.$2,625✓
• d.$1,500

A $75,000 purchase falls in the $50,000-$99,999 tier at 3.5%: $75,000 x 0.035 = $2,625. Applying the first-tier 4.5% ($3,375) ignores that the breakpoint already lowered the rate; reaching 2.5% would require $100,000 (FINRA Rule 2341).

An investor signs a $50,000 letter of intent and deposits $30,000, then adds nothing more before the letter expires. The fund will:

• a.Automatically renew the letter for another 13 months
• b.Liquidate shares held in escrow to collect the higher sales charge due on the $30,000 actually invested✓
• c.Charge a cash penalty equal to the unmet $20,000 commitment, since a signed letter of intent is a binding purchase obligation
• d.Refund all sales charges the investor paid

A letter of intent is not binding; if the investor fails to reach the stated amount within 13 months, the fund redeems escrowed shares to recover the difference between the reduced and full sales charge on the amount actually invested (FINRA Rule 2341).

FINRA rules cap a fund's total annual 12b-1 charge (asset-based sales charge plus service fee) at what percentage of average net assets?

• a.0.25%
• b.1.00%✓
• c.0.75%
• d.0.50%

Under FINRA Rule 2341 the service (shareholder-servicing) fee is capped at 0.25% and the asset-based sales charge at 0.75%, for a combined ceiling of 1.00% of average net assets per year.

Which description best fits Class C mutual fund shares?

• a.A high front-end load and no ongoing 12b-1 fee
• b.A level ongoing asset-based fee and usually a small 1% contingent deferred sales charge that lapses after about one year✓
• c.The lowest total cost of any class for a 20-year holding period
• d.A back-end charge that steps down over six years and then converts to Class A, giving it the lowest long-run cost of any share class

Class C shares carry a level annual asset-based (12b-1) fee and typically a 1% CDSC that expires after roughly 12 months, which suits short horizons but is costly over long periods because the level fee never goes away.

An investor buys $600 of a fund each quarter. In a fluctuating market, the mathematical result over time is that the investor's average cost per share is:

• a.Guaranteed to produce a profit
• b.Equal to the average of the prices paid
• c.Higher than the average of the prices paid, because a fixed schedule concentrates buying when prices are high over the full holding period
• d.Lower than the average of the prices paid, because the fixed dollar amount buys more shares when prices are low✓

Dollar cost averaging buys more shares at low prices and fewer at high prices, so average cost per share is mathematically below the simple average of the prices paid. It does not guarantee a profit or eliminate market risk.

Shares of a closed-end investment company in the secondary market are priced at:

• a.A fixed price stated in the prospectus
• b.A market price set by supply and demand, which may be above or below net asset value✓
• c.Net asset value plus a maximum 8.5% sales charge, the same ceiling that applies to open-end mutual fund shares
• d.Net asset value only, set once daily

A closed-end fund issues a fixed number of shares that then trade among investors, so the market price can be at a premium or discount to NAV. Redeemability at NAV is instead the hallmark of open-end funds.

A unit investment trust is characterized by:

• a.A fixed, unmanaged portfolio, no board of directors or investment adviser, and a stated termination date✓
• b.Shares that trade on an exchange at a premium or discount, with the trust adjusting the portfolio to track a benchmark
• c.An actively managed portfolio and a board of directors
• d.A perpetual existence with no termination date

A UIT holds a fixed portfolio under a trust indenture with a preset end date and needs neither a board nor an adviser (Investment Company Act of 1940). Its redeemable units are not exchange-traded like closed-end shares.

Which statement about a money market mutual fund is correct?

• a.It guarantees investors a fixed rate of return
• b.It trades on an exchange at a premium or discount to NAV
• c.Its shares are insured by the FDIC up to applicable limits because the fund holds only bank-issued instruments
• d.It invests in short-term, high-quality instruments and generally is sold with no sales charge✓

Money market funds hold short-term, high-quality paper, are typically no-load, and seek a stable $1.00 NAV. They are securities, not FDIC-insured deposits, and can in rare cases lose value.

How does a retail investor typically buy and sell shares of an exchange-traded fund (ETF)?

• a.In the secondary market at intraday market prices, with only authorized participants dealing in creation units✓
• b.By redeeming directly with the fund at NAV, like an open-end fund, with the trade priced once daily after the market close
• c.At NAV computed once at the market close
• d.Only in large creation units of 50,000 shares

Retail investors trade ETF shares intraday on an exchange at market prices; only authorized participants create or redeem large creation units directly with the fund, and arbitrage keeps the price near NAV (Investment Company Act of 1940).

Compared with a broadly diversified equity fund, a sector fund concentrated in one industry primarily exposes an investor to greater:

• a.Purchasing power risk, because a single industry cannot keep pace with long-run inflation
• b.Interest rate risk
• c.Reinvestment risk
• d.Non-systematic (industry concentration) risk✓

Concentrating in a single industry increases non-systematic (unsystematic) risk that broad diversification would otherwise reduce. Interest rate and reinvestment risks chiefly affect bonds, and all equities share systematic risk.

A fund that holds a continuous mix of common stocks and bonds to provide both growth and income is called a:

• a.Sector fund
• b.Balanced fund✓
• c.Specialized fund
• d.Money market fund

A balanced fund blends equities for growth with fixed income for income and relative stability in one portfolio. Sector, money market, and specialized funds pursue narrower objectives.

An index fund is best described as a fund that:

• a.Actively trades to beat its benchmark and charges high fees to cover its research and frequent portfolio turnover
• b.Guarantees the exact return of the index it tracks
• c.Is always organized as a closed-end fund
• d.Seeks to replicate a market index, with low expenses and low portfolio turnover✓

An index fund passively mirrors a benchmark, keeping management, research, and trading costs low. It tracks but cannot guarantee the index return, and it is commonly an open-end fund or ETF.

A fund whose primary objective is maximum capital appreciation, with little or no current income, is a:

• a.Growth fund✓
• b.Money market fund
• c.Government bond fund
• d.Balanced fund

A growth fund invests in companies expected to appreciate, reinvesting rather than paying large dividends, so it fits a long-horizon appreciation objective. The other choices emphasize income or stability.

A fund has annual operating expenses of $8,000,000 and average net assets of $640,000,000. Its expense ratio is:

• a.1.25%✓
• b.0.125%
• c.0.80%
• d.8.00%

Expense ratio = annual operating expenses / average net assets = $8,000,000 / $640,000,000 = 1.25%. It captures ongoing costs such as the advisory and 12b-1 fees, not one-time sales charges.

A shareholder submits a redemption order for a mutual fund at 2:00 p.m.; the fund prices once daily at the 4:00 p.m. close. The shareholder receives:

• a.The average of today's and yesterday's NAV
• b.The prior day's closing NAV
• c.That day's NAV computed at the 4:00 p.m. close✓
• d.The NAV at the moment the order was received, locking in the intraday price quoted when the customer phoned in

Forward pricing requires purchase and redemption orders to be executed at the next NAV computed after the order is received, which here is the 4:00 p.m. close (Investment Company Act of 1940). Proceeds must be paid within seven days.

Under the Investment Company Act of 1940, once a mutual fund receives a proper redemption request, it must pay the proceeds within:

• a.Seven calendar days✓
• b.Fifteen calendar days
• c.Thirty calendar days
• d.Two business days

The Act requires redemption proceeds to be sent within seven calendar days of a proper request, absent an SEC-approved suspension. Ordinary trade-settlement conventions do not govern the statutory redemption deadline.

When a customer buys open-end fund shares, the public offering price the customer pays consists of:

• a.The net asset value per share plus the applicable sales charge✓
• b.A price negotiated between the customer and the representative
• c.The net asset value per share minus a redemption fee
• d.The prior day's closing price plus a commission

For a load fund the POP equals NAV plus the sales charge, with the charge figured as a percentage of the POP (FINRA Rule 2341). Fund shares are not priced by negotiation or by the prior day's close.

A 40-year-old will invest a $300,000 lump sum for retirement 25 years away and add more over time. Which share class is generally most appropriate?

• a.Any class, since long-run costs are identical
• b.Class A, because the large purchase earns steep breakpoint discounts and ongoing expenses are lowest✓
• c.Class C, so the level fee stays constant
• d.Class B, so the deferred charge disappears over time and the large purchase avoids any front-end sales charge entirely

A large, long-horizon investment favors Class A: breakpoints sharply cut the front-end load and the low 12b-1 fee compounds into a small drag over decades. Class C's level fee costs far more over 25 years, and Class B is usually unavailable at this size.

A key tax feature of a non-qualified variable annuity's accumulation phase, compared with a taxable mutual fund account, is that:

• a.Earnings grow tax-deferred until withdrawal, when they are taxed as ordinary income✓
• b.Gains are taxed as long-term capital gains
• c.Contributions are federally tax-deductible, much like pre-tax contributions to a traditional retirement account
• d.Distributions are always tax-free

A non-qualified annuity's earnings compound tax-deferred, but withdrawals are taxed as ordinary income on a LIFO basis, never at capital-gains rates (Internal Revenue Code). Contributions to a non-qualified annuity are not deductible.

A variable annuity has an assumed interest rate (AIR) of 5%. In a month when the separate account earns 3%, the next annuity payment will:

• a.Be suspended until performance recovers
• b.Stay the same
• c.Increase from the prior payment
• d.Decrease from the prior payment✓

When actual separate-account performance is below the AIR, the annuity unit value falls and the payment decreases versus the prior one. Performance above the AIR raises the payment; performance exactly at the AIR keeps it level. The AIR is a pricing benchmark, not a guarantee.

After a variable annuity is annuitized, the number of annuity units credited to the contract each month is:

• a.Fixed, while the value of each unit fluctuates with separate account performance✓
• b.Reduced each year by the surrender charge
• c.Fixed, and each unit's value is also fixed for life
• d.Increased whenever the separate account rises, so a strong market adds more annuity units to the contract each month

At annuitization the accumulated value converts into a fixed number of annuity units; monthly income then varies only because the unit value moves with separate-account performance relative to the AIR.

For a given account value, which annuity settlement option generally produces the smallest monthly payment?

• a.Life with 10-year period certain
• b.Unit refund life annuity
• c.Joint and last survivor✓
• d.Straight life (life only)

Joint and last survivor must cover two lives, the longest expected payout, so each payment is smallest. Straight life pays the most because it ends at the single annuitant's death with no residual guarantee.

A surrender charge on a deferred variable annuity is:

• a.A fee deducted from every purchase payment before investment, similar to a front-end sales load charged on a mutual fund
• b.A contract charge on early withdrawals that typically declines each year and eventually reaches zero✓
• c.A recurring annual charge on all contract assets for life
• d.An IRS penalty on withdrawals before age 59 1/2

The surrender charge lets the insurer recover distribution costs if the owner withdraws in the early contract years; the schedule steps down to zero over time. The 10% early-distribution penalty is a separate IRS tax.

The mortality and expense (M&E) risk charge in a variable annuity compensates the insurer for:

• a.The subaccounts' internal securities trading costs and the brokerage commissions the separate account pays each time it trades securities
• b.Guaranteeing the death benefit and lifetime payout rate and bearing the risk that expenses exceed the contract's ceiling✓
• c.State premium taxes on the contract
• d.The representative's sales commission only

The recurring asset-based M&E charge covers the insurer's mortality guarantees (death benefit and the promise to pay for life at the guaranteed rate) plus the risk that expenses exceed the contract maximum. Trading costs, premium tax, and commissions are separate items.

During a variable annuity's accumulation phase, if the owner dies, the standard (base) death benefit pays the beneficiary:

• a.A fixed amount set by the state
• b.Nothing, because death benefits apply only after annuitization once the contract has been annuitized and payments begin
• c.The projected total of all future annuity payments
• d.The greater of the current account value or total purchase payments made, less withdrawals✓

The common death benefit guarantees the beneficiary at least the money paid in (net of withdrawals) or the account value if higher. Enhanced riders can raise this floor for an added fee.

In a scheduled-premium variable life insurance policy, if the scheduled premiums are paid:

• a.The cash value is guaranteed but the death benefit is not
• b.A minimum death benefit is guaranteed, while the cash value rides on separate-account performance and can fall to zero✓
• c.Neither the cash value nor the death benefit can change
• d.Both the cash value and the death benefit are fully guaranteed by the insurer for as long as the scheduled premiums are paid

Variable life guarantees a minimum face amount as long as scheduled premiums are paid, but the cash value follows the separate account with no floor. Strong performance can raise the death benefit above the minimum.

Compared with scheduled-premium variable life, variable universal life (VUL) generally adds:

• a.Investment only in the insurer's general account
• b.Fixed, unchangeable premiums
• c.A fully guaranteed cash value that the insurer credits regardless of separate-account performance
• d.Flexible premium payments and an adjustable death benefit within limits✓

VUL combines variable-life investment risk with universal-life flexibility, letting the owner vary premiums and adjust coverage within limits. Its cash value still depends on the separate account and is not guaranteed.

To sell a variable annuity, a representative must hold:

• a.Both a state insurance license and the appropriate FINRA securities registration✓
• b.Only a state insurance license, because the annuity is regulated solely as an insurance contract
• c.Neither, if the sale is made through a bank
• d.Only a FINRA securities registration

Variable products are dual-regulated: the insurance element requires a state license and the security element (the separate account interest) requires FINRA registration through a broker-dealer. Holding just one credential is insufficient.

The separate account that funds a variable annuity is:

• a.The broker-dealer's proprietary trading account
• b.Part of the insurer's general account, backed by its reserves and its overall claims-paying ability as a company, where the insurer bears all investment risk
• c.Registered as an investment company under the Investment Company Act of 1940 and insulated from the insurer's creditors✓
• d.A bank custodial account titled in the contract owner's name

Variable annuity assets sit in a separate account registered under the 1940 Act (often as a unit investment trust) and shielded from the insurer's general creditors. The general account backs fixed products, where the insurer bears investment risk.

A customer moves the full value of one non-qualified annuity directly into another insurer's non-qualified annuity. Handled correctly, this is:

• a.Taxable only on the gain above cost basis
• b.Fully taxable as ordinary income on the entire value in the year the funds move between the two carriers, with tax due even though no cash was received
• c.Prohibited under state insurance law
• d.A Section 1035 exchange, not a taxable event, though surrender charges may still apply and cost basis carries over✓

Section 1035 of the Internal Revenue Code lets funds move annuity-to-annuity between carriers without current tax; cost basis carries over. Old surrender charges and a new surrender schedule may still apply, which is why suitability review is required.

Which exchange does NOT qualify for tax-free treatment under Section 1035?

• a.Life insurance for life insurance
• b.Annuity for an annuity
• c.An annuity for a life insurance policy✓
• d.Life insurance for an annuity

Section 1035 permits life-to-life, life-to-annuity, and annuity-to-annuity, but not annuity-to-life, which would move always-taxable annuity gains into a contract whose death benefit can pass income-tax-free.

How does a guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity work?

• a.Eliminates all surrender charges
• b.Lets the owner withdraw a stated minimum amount each year regardless of separate-account performance, usually for an extra fee✓
• c.Guarantees the separate account will never lose value, protecting the full account balance from any market decline, so the owner can never lose principal
• d.Converts the contract into a fixed annuity automatically

A GMWB protects a withdrawal stream up to a stated amount even if performance would otherwise deplete the account; the insurer charges an added fee. It does not protect the account value itself or waive surrender charges.

A representative recommends surrendering an in-force variable annuity to buy a new bonus annuity crediting an extra 5% to the deposit. The chief suitability concern is that:

• a.A 1035 exchange cannot be used
• b.Higher ongoing fees and a fresh, longer surrender period may outweigh the bonus, and surrendering the old contract may trigger charges✓
• c.The 5% bonus is immediately taxable
• d.Bonus annuities are illegal

Bonus annuities typically recoup the credit through higher M&E fees and a new multi-year surrender schedule, so the bonus can cost more than it delivers; surrendering the old contract may impose its own charges (FINRA Rules). This is a classic unsuitable-switch red flag.

How is the value of a single accumulation unit in a variable annuity separate account computed?

• a.The performance of the insurer's general account
• b.The assumed interest rate stated in the contract, which is set at issue and fixes the unit value for the life of the contract
• c.A fixed schedule set at issue and never changed
• d.Dividing the separate account's net assets by the number of accumulation units outstanding✓

An accumulation unit works like a mutual fund share: value = separate-account net assets / units outstanding, so it moves with subaccount performance. The AIR prices annuity units only in the payout phase (Investment Company Act of 1940).

For regulatory purposes, an interest in a 529 college savings plan is classified as:

• a.A variable annuity separate account interest
• b.An exempt security subject to no regulation
• c.A municipal fund security, subject to MSRB rules✓
• d.An open-end investment company under the 1940 Act

Because states establish 529 plans, their interests are municipal fund securities governed by MSRB rules; investors receive an official statement rather than a statutory prospectus (Internal Revenue Code Section 529).

Earnings withdrawn from a 529 plan and used entirely for the beneficiary's qualified college tuition are:

• a.Taxed as ordinary income with a 10% penalty
• b.Taxed to the beneficiary at the student's rate
• c.Taxed as a long-term capital gain
• d.Free of federal income tax✓

A 529 plan's earnings grow tax-deferred and come out federally tax-free when used for qualified education expenses (Internal Revenue Code Section 529). Tax plus a 10% penalty on earnings apply only to non-qualified withdrawals.

In a 529 plan, control of the account:

• a.Belongs to the state sponsor
• b.Passes to the beneficiary at the age of majority
• c.Passes to the beneficiary's parents at college enrollment
• d.Stays with the account owner, who may change the beneficiary to another qualified family member✓

Unlike a custodial account, a 529 leaves ownership and control with the person who opened it, including the right to redirect funds to another eligible family member (Section 529). The beneficiary has no ownership right.

What capital structure is an open-end investment company permitted to issue?

• a.Any capital structure the board approves
• b.Common stock and long-term bonds, but no preferred stock, giving the fund a leveraged senior capital structure
• c.Only one class of voting common stock, though it may be offered under different sales-charge arrangements✓
• d.Multiple classes of preferred stock with equal voting rights

The Investment Company Act of 1940 limits an open-end fund to a single class of voting stock, offered through structures such as Class A, B, and C shares. Senior securities such as preferred stock and bonds are permitted only for closed-end funds.

The Investment Company Act of 1940 classifies investment companies as:

• a.Growth, income, and balanced funds
• b.Face-amount certificate companies, unit investment trusts, and management companies✓
• c.Mutual funds, ETFs, and separate accounts
• d.Open-end funds, closed-end funds, and hedge funds, the three legal forms the statute expressly defines

The Act names exactly three classes, with management companies further split into open-end and closed-end. Hedge funds rely on exclusions from the Act, and growth, income, and balanced describe objectives, not legal form.

To qualify as a regulated investment company under Subchapter M and avoid fund-level tax on distributed income, a fund must distribute at least:

• a.50% of its realized capital gains to shareholders
• b.75% of its net investment income to shareholders
• c.90% of its net investment income to shareholders✓
• d.100% of its gross income to shareholders

Under Subchapter M of the Internal Revenue Code, a fund distributing at least 90% of its net investment income is taxed only on amounts it retains, acting as a conduit to shareholders. Falling short subjects all income to corporate tax.

A fund family's combination privilege allows an investor to:

• a.Exchange funds within the family with no tax consequence
• b.Add together simultaneous purchases of two or more funds in the same family to reach a breakpoint✓
• c.Redeem shares with no charge
• d.Combine purchases across unrelated fund families to reach a breakpoint offered by any participating fund sponsor

The combination privilege aggregates concurrent purchases across different funds in the same family so the total qualifies for a quantity discount (FINRA Rule 2341). It should not be confused with the tax-triggering exchange privilege.

An investor uses a fund family's exchange privilege to move from a growth fund to a bond fund at net asset value. For tax purposes:

• a.It is tax-free only if completed within 30 days
• b.No new sales charge applies, but the exchange is a taxable sale of the growth fund and purchase of the bond fund✓
• c.A full front-end load must be paid on the bond fund
• d.It is tax-free because it stays within the same family, so that no gain or loss is ever recognized on the transaction

The exchange privilege waives an additional sales charge but does not change the tax result: the investor has disposed of one security and acquired another, so gain or loss is recognized (Internal Revenue Code). Representatives should disclose this before the exchange.

An open-end fund share is called a redeemable security because:

• a.It can be resold to other investors on an exchange at a market-determined premium or discount to net asset value
• b.The issuing fund stands ready to buy the share back at its next-computed net asset value✓
• c.The sales charge is refunded on redemption
• d.It may be redeemed only at a fixed price stated in the prospectus

A redeemable security is one the issuer repurchases; an open-end fund continuously redeems shares at the next-computed NAV under forward pricing (Investment Company Act of 1940). Exchange resale describes closed-end funds and ETFs.

A prospectus must be delivered to a purchaser of open-end fund shares:

• a.Only if the customer requests it in writing, since delivery is otherwise left to the selling representative
• b.Only for purchases over $10,000
• c.No later than the confirmation of the sale, regardless of dollar amount✓
• d.Within 30 days after settlement

Open-end funds are in continuous primary distribution, so each purchase is a new issue and the buyer must receive the current prospectus by the confirmation (Securities Act of 1933). Delivery does not depend on a request or a dollar threshold.

Detailed disclosure of a fund's officers, brokerage allocation practices, and full financial statements is found in the:

• a.Official statement
• b.Statement of Additional Information, provided free on request✓
• c.Summary prospectus
• d.Annual report only, which the fund mails to shareholders once every three years

The Statement of Additional Information supplements the prospectus with detailed governance, operational, and financial disclosure and must be sent at no charge to anyone who asks (Investment Company Act of 1940).

Which of the following qualifies as a single person eligible to aggregate purchases for a breakpoint?

• a.A parent buying in a UTMA account for one minor child, combined with the parent's own account✓
• b.A group of coworkers pooling funds
• c.Several unrelated partners in a partnership formed to get the discount
• d.An investment club pooling members' money to buy a single fund position together as a group for a shared discount

Breakpoint aggregation covers an individual, a married couple, and their minor children's custodial accounts as one household. Clubs, partnerships, and groups formed mainly to obtain a discount are excluded (FINRA Rule 2341).

When a shareholder elects automatic reinvestment of fund dividends and capital gains, the distributions buy additional shares at:

• a.The public offering price, including the full load
• b.The prior month's average price
• c.Net asset value, with no sales charge✓
• d.A 50% discount to the public offering price

Reinvestment at NAV is one of the features a fund must offer to charge the maximum sales load, letting distributions compound without a new sales charge (FINRA Rule 2341). Charging a load on reinvested distributions would penalize long-term holders.

On the ex-date of a mutual fund's capital gains distribution, the fund's net asset value per share, all else equal:

• a.Doubles
• b.Falls by the amount of the distribution✓
• c.Is unchanged
• d.Rises by the amount of the distribution

A distribution transfers value from the fund to shareholders, so NAV drops by the per-share distribution on the ex-date. This is why selling dividends, urging a purchase just before a distribution, offers no real economic gain.

A fund has total assets of $525,000,000, total liabilities of $25,000,000, and 40,000,000 shares outstanding. Its NAV per share is:

• a.$12.50✓
• b.$20.00
• c.$13.75
• d.$13.13

NAV per share = (total assets - total liabilities) / shares outstanding = ($525,000,000 - $25,000,000) / 40,000,000 = $500,000,000 / 40,000,000 = $12.50 (Investment Company Act of 1940). Ignoring liabilities overstates it at about $13.13.

A customer invests $10,000 at a public offering price of $25.00 per share (the sales charge is already reflected in that price). Ignoring fractions, how many shares are purchased?

• a.400✓
• b.250
• c.375
• d.500

Shares = amount / POP = $10,000 / $25.00 = 400 shares. Because the load is embedded in the $25.00 POP, no separate sales-charge deduction is made.

A fund may impose the maximum 8.5% sales charge only if it offers investors:

• a.A letter of intent, a CDSC, and rights of accumulation
• b.A no-load class and daily liquidity
• c.Breakpoints, rights of accumulation, and reinvestment of distributions at NAV✓
• d.A guaranteed return, breakpoints, and monthly statements that are sent to every shareholder each and every month

FINRA Rule 2341 conditions the 8.5% ceiling on the fund providing breakpoints, rights of accumulation, and reinvestment of distributions at NAV; a fund lacking any of these must charge less. No fund may guarantee a return.

A customer wants to invest $49,000 in a fund whose next breakpoint is at $50,000. The representative processes it without mentioning the breakpoint. This is:

• a.Switching, requiring principal approval
• b.Acceptable, because breakpoints start above $100,000
• c.Acceptable, because the customer named the amount
• d.Breakpoint selling, a prohibited practice✓

Selling just below a breakpoint without disclosing that a slightly larger purchase would cut the sales charge is breakpoint selling, prohibited under FINRA Rule 2341. The customer naming the amount does not excuse the representative's duty to disclose.

Rights of accumulation allow an investor to:

• a.Commit to future purchases within 13 months to keep a discount
• b.Add the current value of existing holdings to a new purchase to reach a breakpoint, with no deadline✓
• c.Count purchases in unrelated fund families toward a breakpoint
• d.Eliminate the sales charge on all future purchases once the first breakpoint is reached, and apply to every later purchase made in the fund family

Rights of accumulation let existing holdings count toward a new purchase's breakpoint, and there is no time limit (FINRA Rule 2341). Committing to future purchases within 13 months describes a letter of intent instead.

A letter of intent for mutual fund breakpoints:

• a.Lets purchases in any fund family count toward the goal
• b.Is a binding contract the investor must complete or forfeit the discount
• c.Covers 24 months and cannot be backdated
• d.Covers 13 months and may be backdated up to 90 days to include a recent purchase✓

An LOI pledges a stated investment within 13 months for a reduced sales charge and may be backdated as much as 90 days to include a recent purchase (FINRA Rule 2341). It is not binding; unmet, the fund liquidates escrowed shares to collect the higher charge.

Which statement about Class B mutual fund shares is accurate?

• a.They pay no 12b-1 fee because the load is deferred
• b.They carry a front-end load and the lowest annual expenses of any class
• c.They may always be redeemed with no charge of any kind
• d.They carry a contingent deferred sales charge that declines each year and typically convert to Class A after a set period✓

Class B shares are sold without a front-end load but impose a CDSC that steps down annually and eventually disappears, after which they usually convert to lower-expense Class A shares. During the CDSC period they carry higher 12b-1 fees, not none.

A fund may call itself no-load only if:

• a.It waives only the front-end charge, with no limit on 12b-1 fees
• b.It has no 12b-1 plan of any kind
• c.Its combined annual asset-based sales and service charges do not exceed 0.25% of average net assets✓
• d.It charges no more than a 3% front-end load

FINRA Rule 2341 permits the no-load label only when combined 12b-1 sales and service charges stay at or below 0.25% per year. A fund with meaningful ongoing distribution fees is not truly no-load even without a front-end charge.

The Securities Act of 1933 is chiefly concerned with:

• a.Regulating secondary-market trading on exchanges, the market activity the statute was chiefly written to oversee under federal law
• b.Requiring full and fair disclosure through registration and a prospectus when securities are first offered to the public✓
• c.Setting IRA contribution limits
• d.Defining the classes of investment companies

The 1933 Act governs the primary market, requiring registration of new offerings and prospectus delivery. Secondary-market regulation comes from the Securities Exchange Act of 1934.

SEC registration of a securities offering means that:

• a.The SEC has judged the offering suitable for retail investors
• b.The SEC certifies the issuer's financial strength
• c.The SEC guarantees the prospectus is accurate and stands behind every material statement the document contains, so investors may rely on it as an official endorsement
• d.The issuer has filed the required disclosure and the SEC has not objected; the SEC does not approve the offering or vouch for its merits✓

SEC review is a disclosure review only; the agency never passes on the merits, and telling a customer otherwise is unlawful (Securities Act of 1933). Every prospectus carries this disclaimer.

The Securities Exchange Act of 1934 is primarily responsible for:

• a.Requiring a prospectus for every new issue
• b.Setting 401(k) contribution limits
• c.Creating the SEC and regulating the secondary market, broker-dealers, and exchanges✓
• d.Defining the three classes of investment companies

The 1934 Act created the SEC and gave it authority over trading markets, broker-dealer registration, public-company reporting, and market manipulation. New-issue prospectus rules belong to the 1933 Act.

Which security is exempt from the registration requirements of the Securities Act of 1933?

• a.U.S. Treasury securities✓
• b.Shares of a new open-end investment company
• c.Common stock of a listed company
• d.Units of a corporate-bond unit investment trust

U.S. government and municipal securities are exempt from the registration requirements of the 1933 Act, though the antifraud provisions still apply. Investment company shares, including UIT units, must be registered and sold with a prospectus.

During the cooling-off period of a registered offering, a representative may:

• a.Send a preliminary prospectus and accept non-binding indications of interest✓
• b.Accept payment from committed buyers
• c.Confirm sales at the expected offering price
• d.Distribute research reports praising the issuer to build early demand among prospective buyers before the effective date

Between filing and effectiveness, only a preliminary prospectus (red herring) and non-binding indications of interest are permitted (Securities Act of 1933). Sales may occur only after the registration is effective and the final prospectus is available.

Under the Investment Company Act of 1940, independent (non-interested) directors must make up at least what portion of a fund's board?

• a.40%✓
• b.51%
• c.10%
• d.25%

The Act requires at least 40% of directors to be non-interested so shareholder interests are represented when advisory contracts are reviewed. Many funds voluntarily exceed this statutory floor.

Before a newly formed open-end fund may offer shares to the public, the Investment Company Act of 1940 requires:

• a.500 shareholders and a bank charter
• b.A five-year performance record
• c.FINRA board approval of the fund's existence
• d.At least $100,000 of net assets and at least 100 shareholders✓

The Act sets a seed-capital requirement of $100,000 in net worth and a 100-shareholder minimum before a public offering may begin. A new fund by definition has no track record.

Changing a fund's fundamental investment objective requires:

• a.Thirty days' written notice, with no vote
• b.SEC approval, with no shareholder vote
• c.A majority vote of the board of directors only
• d.Approval by a majority vote of the fund's outstanding shares✓

A change in a fundamental objective or policy is reserved to shareholders and requires a majority vote of outstanding voting securities (Investment Company Act of 1940). Investors bought a stated strategy, so the board alone cannot redirect their money.

A fund's investment advisory contract must be:

• a.Approved by the investment adviser itself
• b.Approved once and then continue automatically for the life of the fund, with no further shareholder or board involvement required once it is first put in place
• c.Filed with and approved by the Federal Reserve
• d.Approved initially by shareholders and the board, then renewed at least annually by the board, including a majority of the independent directors✓

The Investment Company Act of 1940 ties adviser compensation to review: initial shareholder and board approval, then annual renewal by the board including a majority of non-interested directors. It does not renew automatically.

The Investment Company Act of 1940 generally prohibits an affiliated person, such as the adviser, from:

• a.Selling securities to, or buying securities from, the fund for the affiliate's own account✓
• b.Receiving any advisory fee for the portfolio-management services the affiliate provides under the contract
• c.Attending the fund's board meetings
• d.Voting fund shares the affiliate personally owns

To curb self-dealing, the Act bars affiliates from principal transactions with the fund. Affiliates may still vote shares they own, attend board meetings, and receive contractually approved advisory fees.

A fund's 12b-1 distribution plan must be:

• a.Guaranteed to improve the fund's performance
• b.Approved by the SEC each year before use, which reviews and clears every distribution plan annually
• c.Approved initially and renewed at least annually by the board, including a majority of the non-interested directors, and terminable by them or by a shareholder vote✓
• d.Unlimited in the amount it may charge

A 12b-1 plan needs board approval, annual renewal by a board including a majority of independent directors, and can be ended by those directors or by shareholders (Investment Company Act of 1940). FINRA separately caps the charges.

Regulation Best Interest imposes four component obligations on a broker-dealer recommending securities to a retail customer. They are:

• a.Know-Your-Customer, Anti-Money-Laundering, Privacy, and Advertising
• b.Disclosure, Care, Conflict of Interest, and Compliance✓
• c.Suitability, Diversification, Liquidity, and Disclosure
• d.Registration, Reporting, Recordkeeping, and Renewal

Reg BI requires firms to act in the retail customer's best interest through the Disclosure, Care, Conflict of Interest, and Compliance obligations, a standard above the older suitability rule.

Form CRS (the Customer or Client Relationship Summary) must:

• a.Be signed by a principal before every trade
• b.Be filed with FINRA after each recommendation within ten business days of giving the advice to a retail customer for each account
• c.Be delivered to retail investors, summarizing services, fees, conflicts, standard of conduct, and disciplinary history✓
• d.Be prepared only for institutional clients

Form CRS is a short relationship summary given to retail investors describing the firm's services, fees, conflicts, legal standard of conduct, and disciplinary history (Regulation Best Interest). It is a disclosure, not a per-trade filing.

FINRA's gift rule limits gifts given in connection with the recipient's business to a maximum of:

• a.No limit if the gift is disclosed
• b.$300 per person per year✓
• c.$500 per person per year
• d.$100 per person per year

Effective March 30, 2026, FINRA Rule 3220 raised the gift limit from its long-standing $100 to $300 per recipient per year for gifts tied to the recipient's business. Disclosure does not raise the ceiling.

Before participating in a private securities transaction away from the firm for compensation, a representative must:

• a.Obtain the customer's verbal consent
• b.Give prior written notice to the employing firm and receive the firm's written approval✓
• c.Keep a personal record only of the transaction in a file the representative keeps privately
• d.Inform the firm after the deal closes

Selling away for compensation requires prior written notice and the firm's written approval, after which the firm supervises the activity (FINRA Rule 3280). Unapproved selling away is a serious violation.

A registered representative who takes a paid weekend job unrelated to securities must:

• a.Provide prior written notice to the employing member firm✓
• b.Do nothing, since it is outside FINRA's reach
• c.Resign the securities registration
• d.Obtain SEC approval before starting

Any outside business activity for compensation requires prior written notice to the firm so it can assess conflicts, even when unrelated to securities (FINRA Rule 3270). The firm may impose conditions; silence is the violation.

A representative wants to borrow $5,000 from a customer who is not a family member or a financial institution. This is:

• a.Permitted as long as the interest rate is at market
• b.Permitted with the branch manager's verbal approval
• c.Generally prohibited unless it fits a narrow permitted category and the firm's written procedures allow and approve it✓
• d.Always permitted if repaid within 30 days so long as the customer agrees to the short repayment schedule agreed to in writing

Borrowing from or lending to customers is generally prohibited unless it fits a limited exception (such as family or a lending institution) and the firm's procedures permit and approve it (FINRA Rule 3240). Quick repayment or a market rate does not cure the conflict.

A representative offers to personally reimburse any first-year losses in a nervous customer's account. This is:

• a.Acceptable if documented in the client file
• b.Acceptable with written branch-manager approval
• c.Prohibited, because a registered person may not guarantee a customer against loss✓
• d.Acceptable for accounts under $25,000

Guaranteeing a customer against loss misrepresents investment risk and is flatly prohibited (FINRA Rules). No documentation, supervisory approval, or account size makes the promise permissible.

A registered representative is permitted to share in the gains and losses of a customer's account only when:

• a.The representative contributes at least 50% of the account's capital
• b.The customer requests it verbally
• c.The account is joint with a family member
• d.The firm and the customer give prior written approval and sharing is proportionate to the representative's financial contribution✓

Profit sharing requires written consent from both the member firm and the customer, with the representative's share proportionate to the money actually contributed (FINRA Rules). Verbal permission is never sufficient.

Urging a customer to buy fund shares just before a distribution to capture it is prohibited because:

• a.The customer must then hold the shares for 12 months
• b.Distributions cannot be paid for the first 30 days after purchase
• c.Funds may distribute only once a year
• d.The NAV falls by the distribution amount, so the customer gains nothing and incurs a current tax liability✓

Selling dividends is deceptive: the NAV drops by the distribution on the ex-date, leaving total value unchanged but creating an immediate taxable event (FINRA Rules). The customer is worse off after tax.

Repeatedly redeeming a customer's shares in one fund family and reinvesting in a similar fund at another family, generating a new sales charge each time, is:

• a.Switching, which is prohibited absent a documented customer benefit✓
• b.Front-running, the recognized term for repeatedly moving a customer between fund families
• c.Rights of accumulation
• d.Selling dividends

Moving a customer between funds with substantially similar objectives solely to generate sales charges is switching, prohibited without a documented benefit (FINRA Rules). Front-running and selling dividends are different violations.

A representative learns a customer is about to place a large buy order and immediately buys the same security in a personal account. This is:

• a.Permitted if the personal order is smaller than the customer's
• b.Permitted, since personal trades are separate from customer business
• c.Permitted if disclosed to a supervisor afterward
• d.Front-running, a prohibited practice✓

Trading ahead of a customer's known block order to profit from the expected price move misuses confidential information and is prohibited regardless of size or after-the-fact disclosure (Securities Exchange Act of 1934).

Which practice would most likely be viewed as a prohibited practice by a registered representative?

• a.Documenting a customer's risk tolerance before a recommendation
• b.Recommending a breakpoint-qualified Class A purchase
• c.Depositing a customer's check into the representative's own bank account overnight before forwarding it✓
• d.Delivering the fund's current prospectus to a customer

Commingling customer funds with a representative's personal funds, even briefly, is a serious violation that can amount to conversion (FINRA Rules). Customer checks must be forwarded promptly to the firm.

A written message distributed to more than 25 retail investors within any 30 calendar-day period is classified as:

• a.A retail communication✓
• b.A public appearance
• c.An institutional communication
• d.Correspondence

Exceeding the 25-retail-recipient threshold in a rolling 30-day window makes a communication a retail communication, triggering the stricter principal-approval and filing requirements (FINRA Rule 2210).

A representative emails the same market update to 20 individual retail clients in one month. This communication is categorized as:

• a.An advertisement that must be filed with FINRA
• b.Correspondence, subject to supervision and review procedures✓
• c.A retail communication requiring pre-use principal approval under the rule
• d.An institutional communication exempt from review

Because it reaches 25 or fewer retail investors within 30 days, it is correspondence, which firms must supervise and review under their procedures but need not approve before use (FINRA Rule 2210).

A communication qualifies as an institutional communication when it is distributed only to:

• a.Employees of the member firm
• b.Any customer with an account over $250,000
• c.Retail prospects who have signed a suitability waiver
• d.Institutional investors such as banks, insurers, and registered investment companies✓

The institutional category depends on the recipient's type, not on account size or paperwork (FINRA Rule 2210). A wealthy individual is still a retail investor.

Retail communications generally must be:

• a.Approved by an appropriately registered principal before first use or filing✓
• b.Approved by the customer in writing
• c.Reviewed by the fund's board of directors
• d.Approved by the SEC before use, which must clear all sales literature before a firm distributes it

A registered principal must approve retail communications before use or filing (FINRA Rule 2210). The SEC does not pre-approve sales material, and customers never approve communications aimed at them.

A member firm must retain records of its communications with the public for:

• a.Five years from the date of creation
• b.Permanently, with no exception
• c.One year from the date of first use
• d.Three years from the date of last use, the first two years in an easily accessible place✓

Communications records must be kept three years from last use, with the earliest two years readily accessible (FINRA Rule 2210). The five-year period applies to certain AML records, not general communications.

Which is an acceptable way to present a fund's past performance in a retail communication?

• a.Showing only the fund's best three-year period
• b.Describing a bond fund's yield as guaranteed
• c.Showing standardized average annual total returns for 1-, 5-, and 10-year periods, or since inception✓
• d.Projecting the fund's expected return over the next five years based on the portfolio manager's stated performance targets

Standardized total returns for the required periods, current to the most recent quarter-end, allow fair comparison (FINRA Rule 2210). Cherry-picking, projecting, or guaranteeing returns is prohibited, and past-performance disclaimers are required.

A firm wants to use a customer testimonial in a retail communication. The rule requires that:

• a.The testimonial be filed with the SEC before use
• b.The testimonial be notarized by the customer
• c.Testimonials be prohibited in all securities communications
• d.The communication disclose that the experience may not be typical and that any compensation paid was made✓

Testimonials are allowed with clear disclosure that the experience is not necessarily representative and that any material payment was made (FINRA Rule 2210). Testimonials about technical advice also require disclosure of the speaker's qualifications.

A customer brings in $12,000 of cash and deposits it on a single business day. What must the firm file?

• a.Nothing, because the deposit is under $25,000
• b.A Suspicious Activity Report only
• c.A Currency Transaction Report✓
• d.Form 1099-B with the IRS

Cash transactions over $10,000 in one business day trigger a Currency Transaction Report under the Bank Secrecy Act, whether or not anything seems suspicious. A SAR is required only when the activity itself raises suspicion.

After a firm files a Suspicious Activity Report on a customer, the firm:

• a.May notify the customer with the customer's written consent
• b.Must give the customer a copy within 10 business days
• c.Must close the account immediately
• d.Must not notify the customer that a SAR was filed✓

Tipping off a customer about a SAR filing is prohibited because it would compromise any investigation (Bank Secrecy Act). SARs generally cover suspicious transactions of $5,000 or more and are filed with FinCEN.

A firm's customer identification program must, at a minimum, collect from a new individual customer:

• a.Passport number and two professional references
• b.Employer, annual income, and net worth
• c.Credit score and marital status
• d.Name, date of birth, physical address, and taxpayer identification number✓

The CIP requires name, date of birth, a street address, and a government identification number to form a reasonable belief about identity (USA PATRIOT Act). Income and net worth are gathered for suitability, not identity.

Before opening an account, a firm must check the customer's name against the Specially Designated Nationals list maintained by:

• a.FINRA's Central Registration Depository
• b.The Municipal Securities Rulemaking Board
• c.The Securities Investor Protection Corporation
• d.The Office of Foreign Assets Control✓

OFAC publishes the Specially Designated Nationals list, and firms may not do business with parties on it (USA PATRIOT Act). The CRD holds registration records, the MSRB writes municipal rules, and SIPC provides limited account protection.

The stage of money laundering at which illicit cash is first introduced into the financial system is called:

• a.Layering
• b.Placement✓
• c.Reconciliation
• d.Integration

Placement is the entry point where dirty cash first enters the system; layering then obscures its origin and integration returns it looking legitimate (Bank Secrecy Act). Structuring deposits just under $10,000 is a placement tactic.

In which situation does the Securities Investor Protection Corporation (SIPC) protect a customer?

• a.The customer is defrauded by a private individual outside any brokerage
• b.A mutual fund the customer owns declines in value during a broad market downturn that reduces the account balance in any given year
• c.A member broker-dealer fails and customer cash and securities are missing, up to $500,000 including a $250,000 cash limit✓
• d.The overall market falls into a bear market

SIPC steps in when a member broker-dealer becomes insolvent and customer property is missing, covering up to $500,000 per customer with a $250,000 cash sublimit (Securities Investor Protection Act). It does not insure market losses.

Which statement about a mutual fund summary prospectus is correct?

• a.Eliminates the need for any prospectus whatsoever
• b.Is a short document that satisfies prospectus delivery if the full statutory prospectus is available online and sent on request✓
• c.May be used only with institutional investors and never delivered to ordinary retail customers
• d.Must be filed with the MSRB

The summary prospectus gives key facts in a few pages and satisfies delivery when the full statutory prospectus is posted online and provided on request (Securities Act of 1933). Mutual fund filings go to the SEC, not the MSRB.

Under ERISA, private-sector employer retirement plans are required to:

• a.Be offered to government and church employees
• b.Follow fiduciary standards and minimum participation, vesting, and funding rules to protect participants✓
• c.Invest exclusively in the employer's own stock
• d.Guarantee participants a fixed annual return

ERISA imposes fiduciary duties and minimum eligibility, vesting, and funding standards. Concentrating a plan entirely in employer stock would breach diversification and prudence duties; government and church plans are generally exempt.

Under FINRA's anti-reciprocal rule, a broker-dealer may NOT:

• a.Receive normal sales-charge concessions disclosed in the prospectus
• b.Provide customers a fund's prospectus
• c.Sell shares of funds managed by unaffiliated advisers that compete directly with the firm's own proprietary fund lineup
• d.Favor the sale of a particular fund's shares because the fund directs portfolio brokerage commissions to the firm✓

The anti-reciprocal rule bars a firm from selling fund shares as a quid pro quo for the fund's portfolio brokerage business (FINRA Rule 2341). Disclosed sales concessions and ordinary prospectus delivery are permitted.

FINRA's telemarketing rule generally prohibits an unsolicited cold call to a prospective customer's residence:

• a.Only during the customer's lunch hour
• b.Only on weekends
• c.At any time without exception, since securities solicitations are exempt from calling-hour limits under current guidance
• d.Before 8:00 a.m. or after 9:00 p.m. in the called party's local time, absent an existing relationship or consent✓

FINRA Rule 3230 restricts unsolicited telemarketing calls to between 8:00 a.m. and 9:00 p.m. local time and requires honoring do-not-call requests, unless there is an established business relationship or prior consent.

In an account registered as joint tenants with rights of survivorship, when one owner dies, that owner's interest:

• a.Passes automatically to the surviving owner, outside probate✓
• b.Passes to the deceased owner's estate under the will under state law
• c.Forces liquidation of the account
• d.Reverts to the broker-dealer

Rights of survivorship give the surviving tenant full ownership without probate. Passing to the estate is the tenants-in-common feature; a broker-dealer never takes ownership but will require a death certificate and new paperwork.

Two partners own an account as tenants in common, 60/40. If one partner dies, that partner's share:

• a.Passes to the surviving partner
• b.Passes to the deceased partner's estate under the will or state law✓
• c.Reverts to the broker-dealer
• d.Is split evenly between the survivor and the decedent's heirs by operation of law

Tenants in common allows unequal ownership, and each owner's share passes to the owner's estate, not to the co-tenant. Survivorship is the JTWROS feature and does not apply here.

Which of the following correctly describes an UTMA custodial account?

• a.Gifts are irrevocable, and the account has exactly one custodian and one minor beneficiary✓
• b.The custodian may pledge the securities as collateral for a personal loan
• c.The account may have two custodians for one minor
• d.Gifts may be revoked by the donor at any time before the minor reaches the state's age of majority

A gift into a custodial account is an irrevocable transfer to the minor, and the structure allows one custodian and one minor per account (Uniform Transfers to Minors Act). Using the minor's property for the custodian's benefit breaches fiduciary duty.

An UGMA account for a 10-year-old is registered under which taxpayer identification number, and who is the taxpayer?

• a.The broker-dealer's TIN; the firm
• b.The donor's SSN; the donor
• c.The minor's SSN; the minor (subject to the kiddie-tax rules)✓
• d.The custodian's SSN; the custodian

The property belongs to the minor, so the minor's SSN appears on the account and the minor is the taxpayer, though some unearned income may be taxed at the parents' rate under the kiddie tax (Uniform Gifts to Minors Act).

When a custodial-account beneficiary reaches the state's age of majority:

• a.The account must be liquidated
• b.Ownership reverts to the original donor
• c.The custodian may keep managing it indefinitely
• d.The assets are re-registered in the former minor's name and control passes to that person✓

Custodianship ends at the age of majority; the property is retitled to the now-adult beneficiary with full control (Uniform Transfers to Minors Act). Because the original gift was irrevocable, the donor cannot reclaim it.

To open a brokerage account for a trust, the firm must obtain:

• a.Written consent from every trust beneficiary
• b.A court order appointing the trustee, in every case before the firm may accept any instruction on the account
• c.The trust agreement or a certification of trust identifying the trustee and the trustee's powers✓
• d.Only the trustee's Social Security number

The firm needs documentation showing who the trustee is and what authority the trust grants. A personal SSN is insufficient because the trust is a separate legal entity with its own tax ID; court appointment and beneficiary consents are not routinely required.

Before opening a corporate cash account, a broker-dealer must obtain:

• a.A prospectus for the corporation's own securities
• b.A corporate resolution identifying who is authorized to trade for the corporation✓
• c.Two years of audited financial statements
• d.Each officer's personal guarantee

The corporate resolution establishes the entity's authority and names the individuals empowered to act. Officers do not personally guarantee a corporate account, and financial statements are not a prerequisite for a cash account.

A customer wants a representative to choose which funds to buy and when, without checking first. The representative may do so only if:

• a.The customer confirms each trade within one business day
• b.The account exceeds a firm-set minimum balance that the firm requires before granting any trading authority for that customer
• c.The customer gives prior written discretionary authority and a principal approves the account for discretionary trading✓
• d.The representative documents the customer's verbal instruction

Discretion over asset, amount, and timing requires prior written authorization plus firm acceptance and supervisory review (FINRA Rules). Verbal permission is limited to time-and-price discretion for a specific order that day.

For a standard retail cash account, which statement is correct?

• a.Only the customer's signature is required, not a principal's
• b.The representative completes the form and a principal accepts the account; the customer's signature is not a regulatory requirement✓
• c.The form must be filed with FINRA before the first trade and be cleared by the regulator before the account can trade in every single case
• d.The customer's signature is always required before any trade

For a cash account the representative completes the form and a principal accepts it; the customer's signature is not required, though firms often collect one. Customer signatures are required for margin, discretionary, and options accounts (FINRA Rules).

On learning that an individual account holder has died, the representative should:

• a.Cancel open orders, mark the account deceased, and await documents such as a death certificate and letters testamentary✓
• b.Liquidate all positions immediately to protect the estate
• c.Transfer the assets to the named beneficiary the same day
• d.Continue accepting instructions from the customer's spouse

On notice of death the firm freezes the account, cancels open orders, and accepts instructions only from the estate's duly appointed representative after proper documentation (FINRA Rules). Family members have no authority by relationship alone.

When a customer transfers an account between broker-dealers through the automated transfer system, the carrying firm must:

• a.Obtain FINRA approval before releasing the assets
• b.Complete the transfer within 30 calendar days
• c.Liquidate all positions and transfer cash only so that no securities positions move between the two firms to the receiving firm
• d.Validate or take exception within one business day and complete the transfer within three business days of validation✓

The automated customer account transfer process requires validation within one business day and completion within three business days (FINRA Rules). Assets transfer in kind whenever the receiving firm can hold them.

A firm must send the customer a copy of the account record for verification of the investment profile:

• a.Only when the customer requests it in writing each year
• b.Within 30 days of opening the account and at least once every 36 months thereafter✓
• c.Only when the account is closed, at which point the firm mails a final copy of the profile
• d.Every 12 months without exception

SEC books-and-records rules require an initial verification copy within 30 days of opening and a refresh at least every 36 months, plus updates when the firm learns of a material change (Securities Exchange Act of 1934).

Whether a Traditional IRA contribution is deductible depends primarily on:

• a.The custodian's fee schedule
• b.Whether the taxpayer or spouse is covered by an employer plan and the taxpayer's modified adjusted gross income✓
• c.The investments chosen inside the IRA and whether they generate taxable income during the year for the customer's account
• d.Whether the contribution is made before or after year-end

Anyone with earned income may contribute, but deductibility phases out by income when the taxpayer or spouse is in a workplace plan (Internal Revenue Code). Investment choices and fees do not affect deductibility.

A qualified (tax-free) distribution of Roth IRA earnings requires that:

• a.The owner be at least 65
• b.The account be worth less than $100,000
• c.The distribution be taken in the first year
• d.The account has been open five years and the owner is at least 59 1/2, disabled, or deceased, or is buying a first home within limits✓

A qualified Roth distribution needs both the five-year holding period and a qualifying event, after which earnings are federally tax-free (Internal Revenue Code). Contributions, already taxed, may be withdrawn at any time tax- and penalty-free.

A 45-year-old withdraws $18,000 from a Traditional IRA to remodel a kitchen. The federal tax consequence is:

• a.No tax or penalty, since owners may withdraw at any time
• b.Ordinary income tax on the taxable amount plus a 10% early-distribution penalty✓
• c.A 10% penalty only, with no income tax until age 59 1/2, when the tax-deferred income finally becomes taxable
• d.Tax only, because home improvements are a qualified expense

Distributions before 59 1/2 are included in ordinary income and carry a 10% penalty unless an exception applies; kitchen remodeling is not an exception (Internal Revenue Code). Exceptions include death, disability, qualified education, and up to $10,000 for a first home.

Which of the following statements regarding required minimum distributions (RMDs) is accurate?

• a.Both Traditional and Roth IRA owners must begin RMDs at the same age, currently the calendar year in which each owner turns 73
• b.Roth IRA owners must take RMDs but Traditional owners need not
• c.Traditional IRA owners must begin RMDs at age 73 under current law, while original Roth IRA owners face no lifetime RMDs✓
• d.RMDs apply only to accounts larger than $1 million

Tax-deferred Traditional IRAs must begin RMDs at age 73 under current law (SECURE Act 2.0), rising to 75 in 2033. Roth IRAs, funded with after-tax dollars, have no lifetime RMDs for the original owner.

Which of the following best describes a 401(k) plan?

• a.An individual retirement account funded solely by the owner outside of work, with no involvement from the employer at any stage
• b.A defined contribution plan funded by employee salary deferrals, often with an employer match✓
• c.A non-qualified deferred compensation plan for executives only
• d.A defined benefit plan that promises a fixed monthly pension

A 401(k) lets employees defer salary on a pre-tax or Roth basis, frequently with an employer match; the benefit depends on contributions and investment results (Internal Revenue Code). A defined benefit plan guarantees a formula-based pension instead.

Eligibility to participate in a 403(b) tax-sheltered annuity plan is limited to employees of:

• a.Self-employed individuals only
• b.Public schools and qualifying 501(c)(3) tax-exempt organizations✓
• c.Federal government agencies exclusively
• d.Any corporation with fewer than 100 employees

Section 403(b) plans serve public-education employees and staff of qualifying tax-exempt organizations such as hospitals and charities (Internal Revenue Code). Federal employees use the Thrift Savings Plan; the self-employed use SEP or solo 401(k) plans.

A key feature of a SEP IRA is that:

• a.Contributions are made after tax and grow tax-free like a Roth, with no current tax deduction available to the employer
• b.The plan requires annual actuarial certification
• c.Contributions are made by the employer into IRAs established for eligible employees✓
• d.Only employees may contribute, through salary reduction

A simplified employee pension is funded by employer contributions deposited into each eligible employee's own IRA (Internal Revenue Code). Salary deferral is the 401(k)/SIMPLE mechanism, and no actuary is needed for this defined-contribution plan.

For what type of employer is a SIMPLE IRA intended?

• a.Large corporations with thousands of employees seeking a low-cost alternative to a traditional pension plan
• b.Individuals who have no earned income
• c.Small employers, generally those with 100 or fewer employees, funded by employee salary reduction plus an employer contribution✓
• d.Government agencies exclusively

A SIMPLE IRA serves small businesses, generally with 100 or fewer employees, combining employee deferrals with a required employer match or non-elective contribution (Internal Revenue Code). Large employers typically use 401(k) plans.

A customer receives a distribution check from a former employer's 401(k) and wants to move it to an IRA. Which statement is correct?

• a.The customer generally has 60 days to deposit the funds, and a direct trustee-to-trustee transfer avoids withholding and the deadline✓
• b.Rollovers from employer plans to IRAs are not permitted
• c.Indirect rollovers may be done unlimited times in a 12-month period without triggering any tax or withholding on the amounts moved each year
• d.There is a 12-month window to complete the rollover

An indirect rollover must be completed within 60 days or it becomes taxable, and plan distributions paid to the participant face mandatory withholding (Internal Revenue Code). A direct transfer avoids both; IRA-to-IRA indirect rollovers are limited to one per 12 months.

A Coverdell Education Savings Account differs from a 529 plan in that the Coverdell:

• a.Allows contributions regardless of the beneficiary's age, with no cutoff once the beneficiary becomes an adult under the plan rules
• b.Has a relatively low annual contribution limit and income-based eligibility phaseouts, though qualified withdrawals are tax-free✓
• c.Is a municipal fund security regulated by the MSRB
• d.Has no contribution limit

A Coverdell offers tax-free growth for qualified education expenses but caps annual contributions at a low amount and phases out at higher incomes; the 529, not the Coverdell, is the municipal fund security (Internal Revenue Code). Contributions generally must stop at a set beneficiary age.

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

• a.Short-term trading in individual stocks
• b.College tuition 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.Any adult's general retirement, with no disability requirement and no restriction on when the beneficiary began saving at any point during life

ABLE accounts let eligible individuals with disabilities 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).

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 bond fund
• c.A conservative short-duration income fund selected for its stability and quick access to principal
• d.A money market fund

Locking the customer's only liquid money into a long surrender-charge contract conflicts with a one-year liquidity need and would likely trigger surrender charges (FINRA Rules). The other choices keep the money accessible.

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 fund shares cannot be redeemed from an IRA
• d.Holding munis would cause the IRA to lose its tax-deferred status and disqualify the account under the IRS rules

Municipal interest is federally tax-exempt, but an IRA already shelters earnings, so the investor pays for a benefit already provided and forgoes the higher taxable yield available elsewhere (Internal Revenue Code). Munis are not prohibited, just inefficient here.

An investor bought fund shares three months ago and now receives a capital gains distribution from the fund. That distribution is taxed as:

• a.A short-term gain, since the investor held the shares less than a year, matching the investor's brief holding period in the fund
• b.Ordinary income, like all fund distributions
• c.Not taxable until the shares are sold
• d.A long-term capital gain, regardless of how long the investor held the shares✓

Capital gains distributions passed through by a fund are always long-term because the fund's own holding period governs, not the shareholder's (Internal Revenue Code). They are taxable in the year received even if reinvested.

How are qualified dividends paid by an equity mutual fund into a taxable account generally taxed?

• a.At the investor's ordinary income rate in all cases
• b.At the lower long-term capital gains rates, if the holding-period requirements are met✓
• c.Not at all, because the fund already paid corporate tax on the earnings before passing them through to shareholders
• d.Only when the investor sells the fund shares

Dividends meeting the qualified requirements receive the favorable long-term capital gains rates (Internal Revenue Code). Non-qualified dividends and most bond-fund interest are taxed as ordinary income; the shareholder is the taxpayer.

A fund distribution characterized as a return of capital has the immediate effect of:

• a.Increasing the shareholder's cost basis
• b.Reducing the shareholder's cost basis, with no current tax✓
• c.Ordinary income tax on the full amount
• d.A current long-term capital gain equal to the distribution

A return of capital is the investor's own money returned, so it is not currently taxable but lowers basis, increasing the taxable gain on a later sale (Internal Revenue Code). Once basis reaches zero, further returns of capital become taxable gain.

An investor automatically reinvests $2,500 of taxable fund distributions over several years. The effect on cost basis is that basis:

• a.Decreases by $2,500
• b.Increases by $2,500, because the distributions were already taxed✓
• c.Is irrelevant, since reinvested shares are tax-free when sold because the tax was already collected on the original purchase
• d.Stays the same, because no outside money was added

Reinvested distributions are taxed in the year received, so adding them to basis prevents taxing the same dollars again at sale (Internal Revenue Code). Failing to track reinvestments is a common cause of overstated gains.

An investor sells fund shares at a $3,000 loss on May 5 and buys shares of the same fund on May 20. The result is:

• a.The loss is permanently forfeited
• b.The full $3,000 loss is deductible in the current year, since the repurchase was a separate and independent transaction
• c.The loss is disallowed under the wash-sale rule and added to the basis of the replacement shares✓
• d.Only half the loss is deductible

Repurchasing a substantially identical security within 30 days before or after the sale triggers the wash-sale rule, deferring the loss and adding it to the replacement shares' basis (Internal Revenue Code). Waiting 31 days would preserve the deduction.

Absent an election, which cost-basis method applies to mutual fund shares?

• a.Highest cost first
• b.Last in, first out
• c.First in, first out✓
• d.Average cost, double category

The IRS default for securities, including fund shares, is first in, first out, which sells the oldest shares first (Internal Revenue Code). Investors may instead identify specific shares at sale or elect an average-cost method through the fund.

A shareholder of a municipal bond fund receives $1,000 of interest distributions and a $400 capital gains distribution. The federal tax treatment is:

• a.Both amounts are fully taxable as ordinary income, because all mutual fund distributions are ordinary income passed through to the shareholder
• b.The interest distribution is generally exempt from federal income tax, while the capital gains distribution is taxable✓
• c.Both amounts are exempt from federal income tax
• d.The interest is taxable and the capital gain is exempt

Interest passed through from municipal bonds keeps its federal tax-exempt character, but gains the fund realizes from selling bonds are taxable capital gains (Internal Revenue Code). Certain private-activity income may also be subject to the AMT.

How are earnings withdrawn from a non-qualified annuity before annuitization taxed?

• a.As ordinary income on a last-in, first-out basis, so earnings come out first✓
• b.As long-term capital gains
• c.On a first-in, first-out basis, so principal comes out first
• d.Only at full surrender, never on partial withdrawals

Non-qualified annuities use LIFO ordering: the taxable earnings are deemed withdrawn before after-tax principal, taxed at ordinary rates (Internal Revenue Code). Partial withdrawals are taxable when taken, and a 10% penalty applies before 59 1/2.

When a non-qualified annuity is annuitized, the exclusion ratio is used to determine:

• a.How the death benefit is split among beneficiaries
• b.What portion of each payment is a tax-free return of the owner's after-tax cost basis✓
• c.The surrender charge remaining each year
• d.The assumed interest rate for the payout phase

Each annuity payment is split between a tax-free recovery of after-tax investment and a taxable earnings portion, set by the exclusion ratio (Internal Revenue Code). Once basis is fully recovered, later payments are fully taxable.

A variable annuity held inside a Traditional IRA funded entirely with deductible contributions is distributed at age 66. The distribution is:

• a.Fully taxable as ordinary income, because there is no after-tax cost basis✓
• b.Entirely tax-free because it is an annuity
• c.Taxed at long-term capital gains rates on the growth
• d.Taxable only on the earnings portion

When every dollar went in pre-tax, the contract has no basis, so the entire distribution is ordinary income (Internal Revenue Code). An exclusion ratio applies only to non-qualified contracts funded with after-tax money.

An investor dies owning fund shares purchased for $30,000 that are worth $70,000 on the date of death. The heir's cost basis is generally:

• a.$50,000, the average of cost and market value, the figure the tax rules require for property received from a decedent
• b.$30,000, the decedent's original cost
• c.$70,000, the fair market value at the date of death✓
• d.Zero, because inherited property has no basis

Inherited property generally receives a stepped-up basis equal to its date-of-death fair market value, erasing the unrealized gain for income-tax purposes (Internal Revenue Code). Gifted property during life, by contrast, generally carries over the donor's basis.

A non-qualified variable annuity passes to a beneficiary at the owner's death. Compared with inheriting appreciated mutual fund shares, the annuity:

• a.Also receives a full step-up in basis to date-of-death value
• b.Does not receive a stepped-up basis; the gain above cost basis is taxed to the beneficiary as ordinary income✓
• c.Passes entirely income-tax free to the beneficiary
• d.Is taxed to the beneficiary at long-term capital gains rates on the gain

Annuity gains are tax-deferred ordinary income and do not get a step-up, so the beneficiary owes ordinary income tax on the amount above the owner's basis (Internal Revenue Code). Inherited appreciated fund shares generally do get a basis step-up.

A parent gifts appreciated fund shares (cost $10,000, current value $25,000) to an adult child during the parent's life. For figuring a future gain, the child's basis is generally:

• a.Zero
• b.$25,000, the value at the date of the gift
• c.$17,500, the average of cost and value
• d.$10,000, the donor's carryover basis✓

Property received by gift generally takes a carryover basis equal to the donor's basis for figuring a later gain (Internal Revenue Code). A step-up to fair market value applies to inherited property, not to lifetime gifts.

A retiree holds only long-term certificates of deposit and a money market fund. Over a 25-year retirement, the greatest risk to this portfolio is:

• a.Purchasing power (inflation) risk, because returns may not keep pace with inflation✓
• b.Credit risk on the federally insured deposits
• c.Prepayment risk on the money market fund as its short-term holdings are repaid and refinanced early
• d.Currency risk on the domestic certificates of deposit

Low-volatility instruments protect principal but historically deliver little real return, so inflation erodes buying power over a long retirement. Insured deposits carry minimal credit risk, and a domestic portfolio has no meaningful currency exposure.

A widely diversified equity mutual fund is unable to reduce which type of risk?

• a.Systematic risk, also called market risk✓
• b.Business risk of an individual company
• c.Industry concentration risk
• d.Single-issuer default risk

Diversification removes risks specific to a company or industry, but a broad market decline affects nearly all equities, so systematic risk remains. That is why diversified funds still lose value in bear markets.

The dominant risk in a high-yield corporate bond fund, compared with a Treasury fund, is:

• a.Reinvestment risk
• b.Legislative risk
• c.Credit risk, the possibility that issuers default or are downgraded✓
• d.Currency risk

High-yield issuers have weaker balance sheets, so default and downgrade risk drives their price behavior and explains the higher yield. Treasuries carry essentially no credit risk; the other risks do not distinguish the two funds.

If interest rates rise sharply, which of these funds would probably fall the most in price?

• a.A long-term government bond fund with a 20-year average maturity✓
• b.A floating-rate bank-loan fund whose coupons reset upward as rates climb
• c.A money market fund holding overnight government paper
• d.A short-term bond fund with a two-year average maturity

Interest rate risk grows with maturity and duration, so the longest-maturity portfolio suffers the largest price drop when yields rise. Money market and short-term funds reprice quickly, and floating-rate coupons adjust upward, cushioning prices.

If market interest rates rise, what generally happens to the prices of existing fixed-rate bonds held in a bond fund?

• a.Rise, because the bonds pay more income
• b.Become exempt from federal income tax
• c.Fall, because newly issued bonds offer more attractive yields✓
• d.Stay the same, because the coupon is fixed

Bond prices move inversely to interest rates: older bonds paying lower fixed coupons become less attractive, so their prices fall until yields are competitive. The fixed coupon does not protect the market price, and rate changes do not affect tax status.

Which of the following is the common rule-of-thumb definition of a recession?

• a.Any interest-rate increase by the Federal Reserve
• b.A single month of rising unemployment
• c.A decline in real gross domestic product over two consecutive quarters✓
• d.A one-day drop of several percentage points in the major indexes in the major stock indexes

The common rule of thumb defines a recession as two consecutive quarters of falling real GDP, reflecting a broad, sustained contraction. A brief or narrow event such as a one-day market drop does not qualify.

The Federal Reserve carries out U.S. monetary policy chiefly by means of:

• a.Approving the federal budget
• b.Open market operations, the discount rate, and reserve requirements✓
• c.Setting federal income tax rates
• d.Deciding the level of federal program spending

The Federal Reserve manages the money supply and short-term rates through open market operations, the discount rate, and reserve requirements. Tax rates, the budget, and spending are fiscal-policy tools set by Congress and the President.

A customer in a high federal tax bracket wants current income in a taxable account and accepts moderate interest rate risk. The best fit is:

• a.A high-yield corporate bond fund inside an IRA, chosen to shelter the interest income from current taxation
• b.A growth fund that pays no dividends
• c.A municipal bond fund, whose income is generally exempt from federal income tax✓
• d.A money market fund

Tax-exempt interest is worth the most to high-bracket investors, so a municipal bond fund can deliver a better after-tax yield than a comparable taxable fund (Internal Revenue Code). A growth fund provides no current income, and placing a taxable fund in an IRA does not serve a taxable-account income need.