FINRA Series 6 — All Questions

A firm receives a letter from an attorney for one of its customers, alleging that a representative made unauthorized trades in the customer's account. Under FINRA Rule 4513, the letter is:

• a.A customer complaint, since a person acting for the customer alleges misconduct in the trades at issue✓
• b.Not a complaint until the customer personally signs it, because an attorney's letter is only an informal request
• c.A complaint only after the firm finishes investigating and concludes that the trades were in fact unauthorized
• d.Not a complaint unless it demands a stated dollar amount in compensation for the losses

Rule 4513(b) defines a customer complaint as any grievance by a customer, or by any person authorized to act for the customer, involving the activities of the member or an associated person in connection with the solicitation or execution of a transaction or the disposition of the customer's securities or funds. An attorney writing for the customer is such a person, and an allegation of unauthorized trading falls squarely inside that definition. The customer does not have to sign personally, so the letter is not a mere information request. The definition contains no minimum dollar demand. The firm's own view of the merits is also irrelevant, because the rule counts the grievance itself and not whether it later proves justified.FINRA Rule 4513(b)

Earlier this year a customer had her mail held for two months while she was abroad. Right after that hold ended, she asks the firm in writing to hold it two more months because she prefers not to receive paper at home. Under FINRA Rule 3150, the firm:

• a.Needs a reason such as safety or security, since the holds total over three months and convenience does not count✓
• b.May hold it if a principal approves the request and records convenience as the only reason
• c.May hold it on her written request, because each request on its own stays within the three-month limit, so earlier hold periods are not counted against it
• d.May hold it for one more month only, since three months in total is the most that any customer's mail may be held, whatever reason the customer gives

Rule 3150(a)(1) lets a firm hold mail on written instructions that state the time period. If the requested period is longer than three consecutive months, counting any aggregation of periods from prior requests, the instructions must include an acceptable reason, for example safety or security, and convenience is expressly not acceptable. Two months plus two months is four, so the aggregated period passes the threshold and her stated preference does not qualify. Looking at each request alone is the error the aggregation language prevents. Three months is not an absolute cap, because a longer hold is allowed with an acceptable reason. Principal approval cannot turn convenience into an acceptable reason.FINRA Rule 3150(a)(1)

A customer telephones an order at 10:02 a.m., the representative enters it at 10:05, and it executes at 10:09. Under SEA Rule 17a-3(a)(6), what must the order memorandum show?

• a.The 10:02 receipt and 10:09 execution times, but not entry time, which is only an internal detail of the system
• b.Only the 10:09 execution time, because the time of receipt is needed only when an order is later modified
• c.The 10:02 receipt and 10:05 entry times, plus the 10:09 execution time to the extent that it is feasible✓
• d.Only the 10:05 entry time, since an order is not received by the firm until it is entered

The memorandum of each brokerage order must show the terms and conditions, the account, the time the order was received, the time of entry, and the price at which it was executed, and, to the extent feasible, the time of execution or cancellation. Receipt and entry are separate required times, so the 10:02 call and the 10:05 entry both appear. Treating entry as receipt would erase the gap that supervisors use to look for delays or after-the-fact tickets. Entry time is a required item, not an optional system detail. Receipt time is required for every order, not only modified ones.SEA Rule 17a-3(a)(6)

Two days after a mutual fund customer's address of record is changed, the firm receives a request to add an authorized user with online access. Under the firm's Regulation S-ID identity theft program, this sequence is:

• a.Outside Regulation S-ID, which covers lending and credit card accounts but not brokerage or mutual fund accounts
• b.Routine activity, because adding an authorized user is an ordinary service request that needs no added verification step
• c.A red flag under Regulation S-ID, so the firm should verify the request through contact information on file✓
• d.A red flag only if the request arrives by mail, since a request made online is presumed to come from the customer

The guidelines in Appendix A to Regulation S-ID list, as a red flag, a request for a new, additional or replacement means of accessing a covered account, or for an added authorized user, shortly after a notice of change of address. Appropriate responses include contacting the customer and monitoring the account, and the program should address verifying change-of-address requests on existing accounts. Treating it as routine ignores the pattern that account-takeover fraud commonly follows. Online requests are not presumed genuine. The rule is not limited to credit cards: its definition of account expressly includes brokerage accounts and mutual fund accounts.17 CFR 248.201 and Appendix A (Red Flag 19)

A customer signs a separate letter authorizing the firm to submit drafts drawn on her bank account for fund purchases. Under FINRA Rule 4514, how long must the firm preserve that letter?

• a.Three years after the date the authorization expires, rather than from the date it was signed✓
• b.Three years after the date she signed it, because the retention clock starts when a record is made
• c.Four years after the last draft was submitted, the same period that applies to complaint records
• d.No set period, since no record of a separate authorization is required once the draft clears

Where the written authorization is separate from the negotiable instrument, Rule 4514 requires the member to preserve it for three years following the date the authorization expires, so the clock starts at expiration and not at signing. Counting from the date she signed it starts the clock too early for an authorization that stays in use. Four years is the period for complaint records under Rule 4513, a different rule. The rule does require the separate authorization to be kept, although it does not require copies of the signed drafts themselves.FINRA Rule 4514

A firm agrees to hold a customer's mail for six weeks while he travels and has his written instructions stating that period. Which additional step does FINRA Rule 3150 require?

• a.Sending a copy of each held statement to his representative so that she can keep him informed
• b.Having a principal open and log each held item so the firm can later show that no mail was lost
• c.Restricting the account to closing transactions until the customer returns and the hold ends
• d.Telling him in writing of other ways to monitor the account, such as email, and getting his confirmation✓

Rule 3150(a)(2) requires the firm to tell the customer in writing about alternate methods of receiving or monitoring account activity, such as email or website access, and to obtain his confirmation that he received that information. It must also verify at reasonable intervals that his instructions still apply. Opening his mail would work against the rule, which requires safeguards so that held mail is not tampered with. Nothing in the rule restricts trading in the account during the hold. Routing statements to the representative is the kind of use of held mail by an associated person that Rule 3150(c) is meant to prevent.FINRA Rule 3150(a)(2) and (c)

A shareholder owns 800 fund shares and has elected automatic reinvestment. The fund pays $0.45 per share, its maximum front-end load is 5.00%, and the prospectus says distributions are reinvested at NAV without a sales charge. If the NAV on the reinvestment date is $24.00, how many shares does she receive?

• a.15.29 shares, using NAV less the $0.45 payout
• b.15.00 shares, from $360 of distributions at NAV✓
• c.14.25 shares, after a 5.00% load on $360
• d.10.80 shares, from the payout times the NAV

The distribution is 800 x $0.45 = $360. Reinvestment is at NAV with no sales charge, so the shares received are $360 / $24.00 = 15.00. Applying the 5.00% load would give $342 / $24.00 = 14.25 shares, but the prospectus waives it for reinvestment. Dividing by NAV less the payout, $360 / $23.55 = 15.29, uses a price that is not the reinvestment price stated. Multiplying the per-share dividend by NAV, 0.45 x 24 = 10.80, is not a share count for this purchase.17 CFR 270.22d-1 and the fund prospectus

A customer's systematic withdrawal plan redeems $1,500 of fund shares at an NAV of $15.00. She bought the redeemed shares three years ago at $13.00 per share. What is the tax result of this withdrawal?

• a.A $200 long-term capital gain, the proceeds less the cost of the 100 shares redeemed✓
• b.No tax until withdrawals exceed the $1,300 cost of the shares, and then every dollar is taxable
• c.A $200 short-term capital gain, since each plan payment is treated as a new redemption of shares
• d.$1,500 of ordinary income, since a withdrawal plan pays out as a dividend would

A systematic withdrawal plan sells shares, so each payment is a redemption. $1,500 / $15.00 = 100 shares. Their cost was 100 x $13.00 = $1,300, so the gain is $1,500 - $1,300 = $200, and because the shares were held more than one year it is long-term. Only the gain is taxed, not the whole payment, so ordinary income on $1,500 is wrong. Recovering principal first is not how fund redemptions are taxed, because each sale is measured against the cost of the shares redeemed. The holding period is that of the shares sold, not the date of the plan payment.IRC Sections 1001 and 1222(3)

A shareholder's $360 of cash dividends buys 10 shares through a corporation's dividend reinvestment plan at $36 per share. The shares' fair market value on the dividend payment date is $40. What is the tax treatment?

• a.$360 of dividend income, and the $40 discount is a gain taxed when sold
• b.$360 of dividend income, with the shares' basis also $360
• c.$400 of dividend income, which becomes the shares' basis as well✓
• d.$400 of dividend income, but the shares' basis is only the $360 paid

When a dividend reinvestment plan sells stock at less than fair market value, the shareholder reports as dividend income the fair market value of the additional stock on the dividend payment date: 10 x $40 = $400, which is the $360 dividend plus the $40 discount. The basis is the same $400. Reporting only the cash dividend ignores the discount. Reporting $400 as income and keeping a $360 basis would tax the same $40 twice, once now and again on sale. Deferring the discount to the sale date contradicts the rule that it is income when the shares are received.IRS Pub. 550, Dividends Used To Buy More Stock; DRIPs

A customer bought 100 fund shares on January 5, 2025. A distribution reinvested on December 15, 2025 bought 5 more shares. On March 10, 2026 she sells all 105 shares at a gain. How is the gain treated?

• a.Long-term on the 100 original shares and short-term on the 5 shares bought by reinvestment✓
• b.Short-term on all 105 shares, since the last purchase was under a year before the sale
• c.Long-term on all 105 shares, since reinvested shares take the original holding period
• d.Short-term on the 100 originals and long-term on the 5, since the distribution was taxed in 2025

The holding period of each reinvested share begins the day after it is purchased. The original 100 shares were held more than one year on March 10, 2026, so their gain is long-term. The 5 reinvested shares were bought December 15, 2025 and held under one year, so their gain is short-term. Reinvested shares do not inherit the original holding period, and the most recent purchase does not reset the clock on earlier shares. The fact that the distribution was taxable in 2025 affects basis, not the holding period.IRS Pub. 550, Reinvested distributions (holding period)

A shareholder's systematic withdrawal plan pays $1,000 a month. The fund's NAV is $25.00, $20.00 and $16.00 on the three redemption dates. How many shares does the plan redeem over the three months?

• a.120 shares, from $3,000 divided by the starting NAV of $25
• b.147.54 shares, from $3,000 divided by the $20.33 average NAV
• c.152.5 shares, from summing each month's $1,000 divided by that month's NAV✓
• d.187.5 shares, from $3,000 divided by the lowest NAV of $16

Each month redeems $1,000 / NAV: $1,000 / $25 = 40 shares, $1,000 / $20 = 50 shares, and $1,000 / $16 = 62.5 shares, for a total of 152.5. A fixed dollar withdrawal redeems more shares when the price is lower, which is why a withdrawal plan can drain an account faster in a falling market. Dividing the total by the simple average price gives 147.54, which understates the shares because the average ignores that more shares are sold at low prices. Using only the starting price or only the lowest price assumes the NAV never changed.Fund prospectus (systematic withdrawal plan); IRC Section 1001

A customer sells 200 fund shares at a loss of $3.00 per share, a $600 loss. Ten days later, automatic reinvestment of a distribution buys 10 shares of the same fund. How much of the loss is disallowed?

• a.$570, which is the loss on the 190 shares that were not replaced by the purchase
• b.$0, because shares bought by reinvestment are not purchases by the investor
• c.$30, the loss on the 10 shares replaced, which adds to the basis of the new shares✓
• d.$600, because any purchase within 30 days of the sale disallows the whole loss

A wash sale occurs when substantially identical shares are bought within 30 days before or after a sale at a loss, and the reinvested shares are a purchase. When fewer shares are bought than sold, the loss is disallowed only on the number of shares bought: 10 x $3.00 = $30. That disallowed amount is added to the basis of the 10 new shares, and the other $570 of the loss is deductible. Disallowing the whole $600 ignores the matching rule. Treating reinvestment as a non-purchase would let investors use plans to avoid the rule. The 190 unreplaced shares are exactly the shares whose loss is allowed.IRC Section 1091; IRS Pub. 550, Wash Sales

A grandmother, a father and an aunt each want to contribute to one child's Coverdell education savings account in the same year. What is the most that may be contributed in total for that beneficiary?

• a.$18,000 from all contributors combined, matching the annual gift tax exclusion
• b.$2,000 from all contributors combined✓
• c.$2,000 from each contributor, for $6,000 in total
• d.$5,000 from all contributors combined

The Coverdell limit applies per beneficiary, not per contributor: aggregate contributions for the taxable year may not exceed $2,000. Excess contributions are not allowed, and contributions also stop when the beneficiary reaches age 18 unless the beneficiary has special needs.Internal Revenue Code Section 530(b)(1)(A)

A Coverdell account distribution is included in income because it is not used for qualified education expenses. What additional tax applies?

• a.An additional 10% tax on the amount includible in income✓
• b.An additional 20% tax on the full amount of the distribution
• c.An additional 6% excise tax on the amount of the excess contribution
• d.No additional tax, because the earnings are simply taxed as ordinary income

Section 530(d)(4) increases the tax on a taxable Coverdell distribution by 10% of the amount includible in income, subject to exceptions such as death or disability. The tax applies to the taxable part, not to the full distribution.Internal Revenue Code Section 530(d)(4)

For a Roth IRA distribution to be a qualified distribution, which two conditions must be met?

• a.The 5-taxable-year period has passed since the most recent Roth contribution, and the owner is at least 59½
• b.The owner is at least 59½ and has not made a contribution in the last three years
• c.The account has been open for two years, and the owner is at least 55, disabled, deceased, or buying a first home with the funds
• d.The 5-taxable-year period has passed since the first Roth contribution, and the owner is at least 59½, disabled, or deceased✓

A qualified Roth distribution must be made after the 5-taxable-year period beginning with the first year the owner contributed to a Roth IRA, and must meet one of the listed events such as age 59½, death, disability, or a qualified special purpose distribution. The clock starts at the first contribution, not the latest.Internal Revenue Code Section 408A(d)(2)

A customer receives a check from her traditional IRA to move the funds to another IRA. To avoid taxation, by when must the full amount be deposited into the new IRA?

• a.Within 30 days after the day the distribution is received
• b.Within 60 days after the day the distribution is received✓
• c.Within 90 days after the end of the tax year of the distribution
• d.By the next April 15 following the year of the distribution

An IRA rollover is tax-free only if the amount is paid into an eligible plan for the individual's benefit not later than the 60th day after the distribution is received. A direct trustee-to-trustee transfer avoids this deadline.Internal Revenue Code Section 408(d)(3)

A 76-year-old IRA owner fails to take a required minimum distribution and corrects the shortfall within the correction window. What is the excise tax on the shortfall?

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

After SECURE 2.0, the excise tax on a missed RMD is 25% of the shortfall, reduced to 10% when the shortfall is corrected within the correction window. The 50% rate was the earlier penalty.Internal Revenue Code Section 4974(a), (e)

To receive incentive stock option treatment on the sale of the stock, an employee must avoid disposing of the shares within what periods?

• a.Two years from the grant of the option and one year from the transfer of the shares to the employee✓
• b.Six months from the grant of the option and one year from the transfer of the shares to the employee
• c.One year from the grant of the option and two years from the transfer of the shares to the employee
• d.Two years from the date the shares are transferred to the employee, and nothing is required from the grant date

Section 422 requires that the shares not be disposed of within two years from the option grant nor within one year after the shares are transferred to the employee. Failing either test makes the sale a disqualifying disposition.Internal Revenue Code Section 422(a)

Under an employee stock purchase plan qualifying under Section 423, what is the lowest permitted purchase price?

• a.90% of the stock's fair market value, measured at the grant or exercise date
• b.100% of the stock's fair market value, since any discount is taxed as compensation
• c.75% of the stock's fair market value, measured at the grant or exercise date
• d.85% of the stock's fair market value, measured at the grant or exercise date✓

A qualifying ESPP may not set the option price below the lesser of 85% of fair market value at grant or 85% of fair market value at exercise. There is also a limit of $25,000 of stock value accruing per calendar year.Internal Revenue Code Section 423(b)

Which exchange can be completed without recognizing gain under Section 1035?

• a.An annuity contract for shares of a mutual fund
• b.A life insurance contract for an annuity contract✓
• c.A life insurance contract for shares of a variable annuity subaccount held outside the contract
• d.An annuity contract for a life insurance contract

Section 1035 allows a life insurance contract to be exchanged for another life contract, an endowment or an annuity contract, and an annuity for another annuity. It does not run in the other direction, so an annuity cannot be exchanged tax-free for a life insurance contract.Internal Revenue Code Section 1035(a)

A life insurance policy fails the 7-pay test. How are loans and withdrawals from the policy taxed?

• a.As a modified endowment contract, with gains taxed first and a possible 10% additional tax before age 59½✓
• b.As a normal life policy, with withdrawals taxed only after the cost basis is recovered
• c.As tax-free, because a life insurance policy loan is never a taxable distribution
• d.As an annuity, with each payment split between return of basis and earnings

A contract that fails the 7-pay test is a modified endowment contract. Distributions, including loans, are taxed gain-first, and a 10% additional tax can apply before age 59½. Death benefits remain income tax free.Internal Revenue Code Sections 7702A, 72(e)(10)

For tax years beginning after 2025, an individual qualifies as an eligible individual for an ABLE account if the blindness or disability began before the individual reached what age?

• a.Age 36
• b.Age 55
• c.Age 46✓
• d.Age 26

The ABLE Age Adjustment Act raised the onset age from before 26 to before 46 for tax years beginning after December 31, 2025. The age 26 limit is the older rule.Internal Revenue Code Section 529A(e)(1)

How is the annual contribution limit for an ABLE account set?

• a.It equals the amount the beneficiary earned that year, up to the standard deduction
• b.It equals the annual gift tax exclusion amount, applied to all contributors combined✓
• c.It is set by the state that sponsors the program, up to a lifetime limit only
• d.It is a flat $2,000 a year, applied to each contributor separately

Total contributions from all contributors for the year may not exceed the Section 2503(b) gift tax exclusion for that calendar year. A beneficiary who works may contribute additional amounts, subject to separate limits.Internal Revenue Code Section 529A(b)(2)(B)

A broker-dealer has an ongoing customer relationship with a client. How often must it provide its privacy notice to customers under Regulation S-P (where no exception applies)?

• a.At least once in every calendar quarter
• b.Only when the account is opened or the policy changes
• c.Once every three years, together with the account agreement
• d.At least once in any period of 12 consecutive months✓

Regulation S-P requires a clear and conspicuous notice to customers not less than annually, meaning at least once in any 12 consecutive months, unless the firm qualifies for the exception for firms that do not share information in ways requiring an opt-out.17 CFR 248.5

A broker-dealer arranges a loan for a customer in connection with the customer's purchase of a security. Under Rule 15c2-5, what must it do before the purchase or loan is entered into?

• a.File a notice of the loan with the SEC and wait ten days before executing the order
• b.Give the customer a copy of the firm's financial statements and confirm the loan only after settlement
• c.Obtain the customer's verbal consent to the loan and record it in the customer file within 30 days
• d.Give a written statement of the loan obligations, risks and all remuneration received, and determine that the whole transaction is suitable✓

Rule 15c2-5 requires written disclosure of the loan terms, the risks and all compensation, plus a documented suitability determination for the whole transaction, before any purchase or loan is entered into.17 CFR 240.15c2-5