Test Improve

Question 1

Customer wants to open new account but refuses to provide suitability info. Under FINRA rules can you open the account?

Answer 1

Yes, you can open the account buy reccomendations must be limited to suitablity info the firm has on the customer. Doesn’t happen much in real world

Question 2

When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period?

Answer 2

None

Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations.

Question 3

A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client?

Answer 3

Ordinary income taxation on the earnings withdrawn until reaching the owner’s cost basis

Question 4

A new municipal bond issue had a dated date of January 1, 2018. The first coupon was due on August 1, 2018. The customer bought for settlement on September 1, 2018. How many months of accrued interest must he pay at settlement?

Answer 4

One month

On a new bond issue, the issuer sets the dated date. That is the date from which interest first begins to accrue. It is not unusual for the first interest payment date to be more than six months from the dated date. That is known as a long coupon (longer than six months). Therefore, on August 1, 2018, seven months of interest was paid (January through the end of July). The customer did not purchase the bond until late August and owes interest only from the August 1, 2018, coupon payment date up to, but not including, the September 1 settlement date (one month).

Question 5

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $25,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is

Answer 5

$8,750

Account holder 58 y/o so extra 10% tax penalty

Only the deferred growth is taxable on a LIFO (last-in, first-out) basis. In this case, it is the amount of the withdrawal in excess of the cost of $25,000. Using LIFO, all of the withdrawal is part of the $47,000 in earnings that have been generated. That $25,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is under 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $25,000. Remember, all annuities are nonqualified unless stated otherwise in the question.

Question 6

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?

Answer 6

$75

Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has “bought back” the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, “On September 15, he purchased 25 shares of KLP stock.” That washes out $25 of the loss, but the rest is okay.

Question 7

Using a Rule 415 shelf registration, an issuer registered 40 million shares of common stock with the SEC. How long is the registration effective for?

Answer 7

Two years, unless the issuer qualifies as a well-known seasoned issuer (WKSI), where it is three years.

There is no need to file a new registration with the Securities and Exchange Commission if the issuer meets the two- or three-year requirement, whichever applies. Beyond these times, a new registration statement would be necessary.

Question 8

T/F: Contributions to 529 plans are made with pretax dollars at the federal level

Answer 8

False

Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.

Question 9

When a customer moves accounts from one BD to another, is it the carrying firm or the receiving firm that sends the transfer initian form (TIF) to ACATS?

Answer 9

The recieving firm sends the TIF to ACATS

Question 10

Interest on direct debt from US gov is taxable at what level(s) (fed, state, local)?

Answer 10

Interest on direct debt (T-bills, T-notes, T-bonds, and STRIPS) is taxable by the federal government but not by state or local governments.

Question 11

Can levereged ETFs be bought on margin?

Answer 11

Yes

They can be purchased on margin just like regular ETFs.

Question 12

T/F: Interest begins to accrue on the last interest payment date and runs up to, but not including, the settlement date

Answer 12

True

Interest doesn’t include the settlement date

Question 13

Mutual funds must show performance statistics for _______ (what time periods)

Answer 13

one, five, and 10 years, or for the life of the fund—whichever is shorter

Mutual fund performance statistics must show results for one, five, and 10 years, or for the life of the fund—whichever is shorter.

Question 14

Would default risk benefit form portfolio diversification?

Answer 14

Yes

Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk

Question 15

Does diversification work best with systematic or non-systematic risk?

Answer 15

Non systematic risk

Diversification works best with nonsystematic (unsystematic) risks.

Question 16

Last week, your customer’s margin account showed SMA of $5,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $45,000. What is the client’s current SMA and buying power?

Answer 16

SMA of $0.00 and buynig power of $0.00

Did you catch the trick here? During the past week, the long market value has dropped to the point where this client is subject to a maintenance call. With only $5,000 of equity ($50,000 minus $45,000) and LMV of $50,000, the equity is only 10% of the LMV, well below the 25% minimum. When a margin account goes below the minimum maintenance level, the SMA is wiped out. This is the only exception to the “use it or lose it” rule

Question 17

An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions?

Answer 17

Never with a nonqualified annuity

On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.

Question 18

On the exam, unless stated otherwise you can assume every annuity is _____ (qualified or nonqualified)

Answer 18

Nonqualified

You can assume every annuity is nonqualified unless stated otherwise

(No RMDs for non qualified annuities)

Question 19

Would an agent comitting the following action be comitting a violation:
Selling securities from a minor’s custodial account without the custodian’s consent but with the beneficial owner’s consent

Answer 19

Yes, would be a violation

The custodian—not the beneficial owner (minor)—is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.

Question 20

Woud an agent comitting the following action be comitting a violation:
Buying securities in a joint account at the request of one party only

Answer 20

No

That’s okay
You can buy in a joint account at the request of just one party

Question 21

If a revenue bond has a net revenue pledge, that means debt service payments (interest and principal) are paid second in line after _______

Answer 21

After operating and mainenance expenses are paid first

When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year’s principal). In a gross revenue pledge, the order is reversed.

Question 22

Account has $50k long market value and $45k debit balance. What’s the equity?

Answer 22

$5k equity

Equity = LMV - DB

Question 23

RMDs for non qualified annuities

Answer 23

None

Are not RMDs for non qualified annuities (unless stated otherwise)

Question 24

A customer must recieve a current options disclosure document at or before the time of ____

Answer 24

Account approval

Must recieve ODD at or before the time account gets approcal for options trading

Question 25

T/F: The options disclosure document must be recieved at or before the time of account approval, but the options AGREEMENT doesn’t have to be SIGNED and RETURNED until 15 days after account approval

Answer 25

True

> ODD, at or before account aproval
Options AGREEMENT, signed and returned within 15 days of account approval

Question 26

Does 5% markup policy apply to primary market transactions?

Answer 26

No
Only secondary market

“The 5% markup policy applies to secondary market transactions in nonexempt securities.”

Question 27

The ABC Insurance Company is advertising its variable annuity product as “ABC Lifetime Income—income generated from mutual fund returns.” This advertisement is

A)
prohibited because it implies returns from mutual funds.
B)
permitted as long as there’s no guarantee.
C)
prohibited because it doesn’t reference an annuity.
D)
permitted.

Answer 27

A) prohibited

Explanation
Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as “annuity.”

Question 28

A syndicate member in a municipal underwriting wishes to place an order with the manager for its own portfolio. Under Municipal Securities Rulemaking Board rules, an order for a related portfolio must be

A)
entered as a designated order.
 B)
disclosed to the manager.
 C)
entered as a group order.
 D)
entered as a presale order.

Answer 28

B) disclosed to manager

Disclosure is necessary to allocate orders. An order for a related portfolio will be accorded member status—the lowest priority.