Practice Exam Questions

Question 1

Which of the following investment companies will always be passively managed?
A. a face-amount certificate company
B. a unit investment trust
C. a mutual fund
D. a closed-end investment company

Answer 1

Answer : B

Explanation:
A unit investment trust is always passively managed. Some mutual funds, such as index funds, may also be passively managed, but not all mutual funds are passively managed.

Question 2

Which of the following is exempt from registering as an investment company under the
Investment Company Act of 1940?
A. a unit investment trust
B. a non-diversified mutual fund
C. a company that sells its securities only to accredited investors
D. a company that has no sales charges or management fees

Answer 2

Answer : C

Explanation:
A company that sells its securities only to accredited investors is exempt from registering as an investment company under the Investment Company Act of 1940. All the other choices describe investment companies that are required to file a registration statement with the SE

Question 3

Ms. Newbie is a registered representative with Savvy Investments and has recently gotten married. (Her new name is Mrs. Newbie-Oldman.)Her husband has been a client of hers, and the couple now wants to put her name on the account. In this case:
A. Mrs. Newbie-Oldman may only share in the account to the extent that she deposits funds in the account.
B. Mrs. Newbie-Oldman must obtain written authorization from Savvy Investments to put her name on the account.
C. Mrs. Newbie-Oldmans husband must provide written authorization to Savvy Investments for his new bride to be included on the account.
D. Both B and C are true statements.

Answer 3

Answer : D

Explanation:
If Mrs. Newbie-Oldman and her new husband want her name on what was previously his account, she must obtain written authorization from her employer, Savvy Investments, and her new husband must provide his written authorization to Savvy. She is exempted from the proportional investment requirement as Mr. Oldmans spouse, but not from the written authorization requirements under FINRA Rule 2150

Question 4

Any compensation earned by a broker-dealer and its registered representative on the sale of mutual fund shares must be returned to the funds underwriter if the purchaser decides to redeem his shares within:
A. 30 days.
B. 1 week.
C. 7 business days.
D. 5 business days.

Answer 4

Answer : C

Explanation:
Any compensation earned by a broker-dealer and its registered representative on the sale of mutual fund shares must be returned to the funds underwriter if the purchaser decides to redeem his shares within 7 business days.

Question 5

A general decrease in price levels in the economy is referred to as:
A. disinflation.
B. stagflation.
C. recession.
D. deflation.

Answer 5

Answer : D

Explanation:
A general decrease in price levels in the economy is referred to as deflation. Disinflation refers to a decrease in the rate of inflation, but price levels in general are still rising.
Stagflation refers to an economic condition characterized by high levels of inflation and high unemployment levels. A recession is a prolonged decline in the general economy, typically measured by a decline in the nations gross domestic product (GDP).

Question 6

Which of the following statements regarding the tax treatment of variable annuity contracts is false?
A. Earnings on the contributions to a variable annuity are not taxed during the accumulation phase.
B. If an investor opts to make a random, partial, lump sum withdrawal, the entire amount of the withdrawal will be taxed as ordinary income to the investor.
C. If an investor opts to receive regular payments of a specific amount -i.e., annuities-part of each payment will be considered repayment of principal and will not be subject to taxation.
D. An investor who makes a withdrawal prior to having reached the age of 62 will be subject to a 10% penalty on the withdrawal.

Answer 6

Answer : D

Explanation:
The false statement is that an investor who makes a withdrawal prior to having reached the age of 62 will be subject to a 10% penalty. As long as the investor has reached the age of 59 , no penalty will be assessed.

Question 7

Which of the following statements about 1035 exchanges are true?
I. A 1035 exchange refers to the exchange of all of the shares owned in one mutual fund for shares of another mutual fund in the same family of funds.
II. A 1035 exchange refers to the exchange of one variable annuity contract for another variable annuity contract without the need to pay tax on any of the income or capital appreciation associated with the original contract.
III. A 1035 exchange refers to the exchange of a variable annuity contract for a whole life insurance policy offered by the same company with no tax consequences to the transaction.
A. I only
B. II only
C. I and II only
D. I, II, and III

Answer 7

Answer : B

Explanation:
Only Selection II is true regarding 1035 exchanges. A 1035 exchange refers to the exchange of one variable annuity contract for another variable annuity contract without the need to pay tax on any of the income or capital appreciation associated with the original contract. This does not refer to the exchange of one mutual fund for another, which is a taxable event; nor does the 1035 exchange involve exchanging a variable annuity for a life insurance policy.

Question 8

George Geek is 30 years old, single, and earns $103,000 a year as a software engineer for a small, start-up IT company. Georges company does not itself offer a retirement plan, and
George is considering his options. The current contribution limits for both the traditional IRA and Roth IRA plans is the lesser of $5,000 or 100% of earned income.
Which of the following statements applies to Georges situation?
A. George’s contributions to a traditional IRA will be tax-deductible.
B. Georges contributions to a Roth IRA will be tax-deductible as long as his income is below the threshold specified by the IRS for the current year.
C. Assuming that George can contribute to both the traditional IRA and the Roth IRA under the current income thresholds, he will be allowed to contribute $5,000 to each of the plans.
D. Assuming that George can contribute to both a traditional IRA and a Roth IRA under the current income thresholds, his combined contribution to the two plans cannot exceed $5,000.

Answer 8

Answer : D

Explanation:
If George is 30 years old, single, and earns $103,000 as a software engineer for a company that does not offer a retirement plan, his combined contribution to a traditional
IRA and a Roth IRA cannot exceed $5,000, assuming that he is eligible to contribute to both. Since George has no other retirement plan, he will be eligible to make tax-deductible contributions to a traditional IRA regardless of his income level. Contributions to a Roth IRA are never tax-deductible in any situation. (FYI: In 2010, a single taxpayer who earns less than $105,000 during the year is eligible to participate fully in a Roth IRA, but this number can change.

Question 9

Which of the following are included in the expense ratio of a fund?

I. 12b-1 fees -
II. brokerage costs incurred by the fund when it buys and sells securities

III. redemption fees -

IV. management fees -
A. I and IV only
B. I, II, and IV only
C. I, III, and IV only
D. I, II, III, and IV

Answer 9

Answer : A

Explanation:
Of the selections, only 12b-1 fees and management fees are included in the expense ratio of the fund. Brokerage costs that the fund incurs when it buys and sells securities are not included (which is why a funds turnover ratio is important to consider.) Redemption fees are paid by the shareholder to the fund, so it would not be included in a funds expense ratio since it is not an expense of the fund.

Question 10

Which of the following statements regarding a unit investment trust (UIT) is false?
A. A UIT has a fixed number of shares.
B. UITs are actively managed.
C. Shares of UITs trade on exchange floors.
D. All UITs are established with a termination date.

Answer 10

Answer : B

Explanation:
The statement that UITs are actively managed is the false statement. All UITs are passively managed. They do have a fixed number of shares that may either be redeemed through the trust or traded on exchange floors, and all UITs are established with a termination date.

Question 11

Which of the following actions will result in a taxable event for Tex Payor, an investor in the
Invest4U Mutual Fund?
I. Tex sells some of his shares of the fund at a profit.
II. Tex exchanges some of his shares in Invest4U for shares of another fund in the same family of funds.
III. Tex opts to reinvest any dividend or capital gain income he might have received in the fund to buy additional shares of the fund in lieu of receiving a check from the fund.
A. I only
B. I and II only
C. I and III only
D. I, II, and III

Answer 11

Answer : D

Explanation:
All three selections describe actions that will result in a taxable event for Tex Payor as an investor in the Invest4U Mutual Fund. If Tex sells some of his shares of the fund for a profit, he will earn capital gains, which represent taxable income to him. When he exchanges some shares of Invest4U for another, he is selling shares of Invest4U to reinvest in the other, and the sale of the shares in Invest4U will result in either a capital gain or capital loss that he must report to the IRS. Even if Tex chooses to reinvest the dividend or capital gain income for which Invest4U would have otherwise have sent him a check, he has to pay taxes on the money as though he had received the check.

Question 12

You have just become a licensed registered representative with Fine, Howard, Fine and
Associates, a broker-dealer. (Congratulations!) You have had a brokerage account with
Anon Brokerage for the past ten years. In this instance, you are required to:
A. transfer the assets in your account with Anon to a Fine, Howard, Fine account and close your account with Anon.
B. provide Fine, Howard, Fine with written notification of this fact.
C. provide Anon Brokerage with written notification of your association with Fine, Howard, Fine.
D. The actions described in both B and C are requirements.

Answer 12

Answer : D

Explanation:
If you have an account with another member firm upon becoming associated with a member firm, you are required to provide both the firm with which you have your account and your new employer in writing of the fact.

Question 13

On Friday, August 6th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21st.The dividend checks were scheduled to be mailed on Friday, October 15th. In this scenario, the payment date is:
A. Friday, August 6th.
B. Friday, September 17th.
C. Tuesday, September 21st.
D. none of the above.

Answer 13

Answer : D

Explanation:
The payment date is none of the choices listed. The payment date is the day the checks are scheduled to be mailed-Friday, October 15th.

Question 14

Private placements are exempt from the registration requirements of the Securities Act of
1933 under the rules contained in:
A. Regulation A.
B. Regulation D.
C. Regulation E.
D. the Securities Exchange Act of 1934.

Answer 14

Answer : B

Explanation:
Private placements are exempt from the registration requirements of the Securities Act of
1933 under the rules contained in Regulation D. Regulation D dictates the qualifications that must be met for the security to be exempted, such as the maximum number of unaccredited investors and the investors to whom the security may be sold. Regulation A dictates the rules to qualify an issue for a small issue exemption. The Securities Exchange
Act of 1934 deals with the secondary market, not the new issue market.

Question 15

A preemptive right:
A. is a call option that is usually attached to a bond as a sweetener.
B. gives a bond owner the option to sell the bond back to the issuer at a pre-specified price.
C. entitles its owner to buy shares of stock at a specified price within a specified time period in order to maintain his proportionate ownership in the firm.
D. is a feature on some preferred stock issues that allows the preferred shareholders to exchange their preferred shares for shares of the common stock of the firm.

Answer 15

Answer : C

Explanation:
A right entitles its owner to buy shares of stock at a specified price within a specified time period in order to retain his proportionate ownership in a firm. As such, it is a call option, but it is not usually attached to a bond as a sweetener; that would be a warrant.

Question 16

Ms. Newbies client, Mr. Nomad, has decided that he wants to go on an extended backpack trip through the Amazon. Since hell be out of touch, he has given a friend of his limited power attorney to act on his behalf. Based on this, Mr. Nomads friend can:
I. present Ms. Newbie with an order to purchase securities on Mr. Nomads behalf.
II. present Ms. Newbie with an order to sell securities on Mr. Nomads behalf.
III. request a check be issued to him so that he can send Mr. Nomad some money.
A. I only
B. I and II only
C. I, II, and III
D. none of the above. Only a relative can hold a power of attorney to engage in financial transactions for the grantor.

Answer 16

Answer : B

Explanation:
Mr. Nomads friend can engage in the activities described in Selections I and II only. A limited power of attorney gives Mr. Nomads friend the authority to buy and sell securities on Mr. Nomads behalf, but not to make any cash withdrawals. He would need a full power of attorney to be able to do so.

Question 17

A bond has a face value of $1,000, matures in 10 years, and pays an 8% coupon, with interest paid semiannually. If the bond is priced to yield 8.8%, it is selling:
A. at par.
B. at a discount.
C. at a premium.
D. at its maturity value.

Answer 17

Answer : B

Explanation:
If the bond is priced to yield 8.8%, it is selling at a discount. Its nominal yield is the same as its coupon rate, 8%, which is what it would yield if it were selling at its par value, which is the same as its maturity value and its face value–$1,000. In order to be yielding more than this, the bond has to be selling for less than its face value, such that investors are also getting a return from capital gains. A bond that is selling below its face value is said to be selling at a discount.

Question 18

Which of the following statements about hedge funds is true?
A. They are fairly low risk since the portfolio managers use investment strategies designed to hedge their bets.
B. They are not regulated by the Investment Company Act of 1940.
C. They are considered to be very liquid investments.
D. They have low management fees, like index funds.

Answer 18

Answer : B

Explanation:
The true statement about hedge funds is that they are not regulated by the Investment
Company Act of 1940. They are very risky, are illiquid-investors may only make contributions and withdrawals at specified times-and they have extremely high management fees.

Question 19

Mr. Schaker hasnt been seeing a lot of clients these days with the recent market downturn- which means he hasnt been generating any commissions, and commissions are his bread and butter. So, Mr. Schaker does some Googling on his computer and notes that a prominent family of load funds has just introduced a new global fund. Scribbling the name and contact information of the fund family on his notepad, he begins calling his existing clients and promoting the new fund, encouraging his clients to redeem some shares in their existing funds to invest in this fund.
Has Mr. Schaker violated any securities laws?
A. No. In FINRA’s rules regarding fair dealing with customers, the SRO clearly states that “This does not mean that legitimate sales efforts in the securities business are to be discouraged. . . “
B. Yes. Mr. Schaker is recommending the fund to his existing clients to benefit himself, not them.
C. No. Research indicates that new funds tend to offer abnormally high returns for the first 12 months of their existence, so Mr. Schaker is doing his clients a favor even if he himself stands to profit.
D. D. Yes. A registered representative should always refrain from recommending shares of a load fund; trades involving load funds should always be unsolicited.

Answer 19

Answer : B

Explanation:
Yes. Mr. Schaker has violated securities laws in recommending a fund that he doesnt even seem to have researched very well to his existing clients, some of whom may not be suitable candidates for a global fund, which invests in foreign as well as domestic securities. Although FINRAs rules do indicate that it is not trying to stymie legitimate sales efforts, Mr. Schakers actions do not fall within this category. There is no research that indicates new funds tend to offer abnormally high funds for the first 12 months of their existence, and if Mr. Schaker would have implied that, he could be up on criminal fraud charges. There is no law, however, that prohibits a registered representative from recommending a load fund to a client, as long as there is a legitimate reason for doing so.

Question 20

Noah Mete is interested in selling his shares of the Lambchops Corporation, which trades over-the-counter. The market maker with the best bid price–$3.15–is Veggie Investments.
The market maker with the best ask price–$3.27-is Carnivor Investments. Noah conducts trades in NYSE-listed stocks through his broker, Omnivor and Associates.
Given this scenario, which of the following statements is true?
A. Noah can sell his shares of Lambchops Corporation at the bid price of $3.15 by contacting Veggie Investments directly.
B. Noah can sell his shares of Lambchops Corporation at the ask price of $3.27 by contacting Carnivor Investments directly.
C. Noah can sell his shares of Lambchops Corporation at the bid price of $3.15 by contacting Omnivor and Associates.
D. Noah can sell his shares of Lambchops Corporation at the ask price of $3.27 by contacting Omnivor and Associates.

Answer 20

Answer : C

Explanation:
Noah can sell his shares of Lambchops Corporation for $3.15 from the market maker with the best bid price, Veggie, by contacting his broker, Omnivor and Associates, which will execute the transaction. The bid price is the price at which market makers in the over-the- counter market are willing to buy the stock, and over-the-counter transactions, like NYSE transactions, are executed by brokers.

Question 21

Upon receiving approval via a majority vote of its shareholders, a mutual fund is permitted to:
A. change from a diversified company to a non-diversified company.
B. engage in margin transactions.
C. retain any dividends and capital gains that it earned on its portfolio rather than paying them out to the shareholders.
D. issue preferred stock.

Answer 21

Answer : A

Explanation:
Upon receiving approval via a majority vote of its shareholders, a mutual fund is permitted to change from a diversified company to a non-diversified company. The fund is not allowed to engage in margin transactions, fail to make dividend and capital gain distributions, or issue preferred stock under any circumstances.

Question 22

Chandler is a registered representative with GetErDone Broker-Dealers, a FINRA member- firm. His friend, Phoebe, is employed by FlyByNight Investments, which is not a member of
FINRA, or any other securities association for that matter. Given these facts:
A. If Chandler executes any transactions for Phoebe, he is required to charge her the same commission that he charges any member of the general public.
B. Chandler is prohibited from engaging in any financial transactions with Phoebe.
C. Chandler is prohibited from splitting any commissions with Phoebe.
D. Both A and C are true.

Answer 22

Answer : D

Explanation:
Given that Chandler is a representative with a member firm while Phoebes employer is not a member of any known securities association, he is required to charge Phoebe the same commission that he charges any member of the general public when executing a transaction for her and is prohibited from splitting commissions with her. He is not prohibited from engaging in any financial transactions with her; he simply must do so for the same commissions or fees, and on the same terms and conditions as are. . .accorded to the general public, according to FINRA.

Question 23

The MaxFee Mutual Fund has a front-end load of 8.5%. If its net asset value (NAV) per share is currently $32, for what price can an investor buy shares of the fund? (Round your answer to the nearest cent.)
A. $29.49
B. $34.97
C. $34.72
D. $29.28

Answer 23

Answer : B

Explanation:
If the MaxFee Mutual Fund has a front-end load of 8.5% and a net asset value per share of
$32, an investor can buy shares of the fund at its offer price of $34.97. Offer price = NAV/
(1 - % load) = $32/ (1 - 0.085) $34.

Question 24

Ms. Fortune died at the relatively young age of 60. Which of the following options are available to her 65-year-old spouse, the beneficiary of her IRA?
I. withdraw the entire balance in a single lump sum
II. continue to make contributions to the IRA as if it were his own
III. roll his deceased wifes IRA into an existing IRA that he owns
A. I only
B. I and II only
C. I and III only
D. I, II, and III

Answer 24

Answer : D

Explanation:
If Ms. Fortune died at the age of 60 and her beneficiary is her 65-year-old spouse, he can choose to withdraw the entire balance in a single lump sum, continue to make contributions to the IRA as if it were his own, or roll the IRA into another existing IRA. If he opts to withdraw the entire balance in a single lump sum, he will have to pay tax on that distribution at his marginal tax rat

Question 25

Which of the following steps in the underwriting process will occur last?
A. The underwriting syndicate is formed.
B. The selling group is organized.
C. The public offering price is set.
D. A red herring prospectus is circulated to the public.

Answer 25

Answer : C

Explanation:
The public offering price is set at the latest possible minute. The underwriters want to have the most current information available when setting the price, especially since they will experience the loss if the securities fail to sell for at least that price.

Question 26

Sarah Bean is a registered representative with NewWave Investments, a family of mutual funds. She has recommended one of NewWaves funds to a client and given him a prospectus. The prospectus provides information about the funds breakpoints and indicates that an investment of $25,000 or more will lead to a reduced front-end load. The prospectus also clearly explains the details of a letter of intent. Sarahs client invests
$23,000 in the fund then and there without even opening the prospectus.
Has Sarah violated any of FINRAs rules of conduct?
A. No. Sarah properly provided her client with a prospectus prior to selling him shares of the fund.
B. Yes. Sarah is required to explain the concepts of breakpoints and letters of intent to her client.
C. Yes. Sarah needed to tell her client that he would have to read through the prospect us to ensure he understood all aspects of the investment before she could take any money from him.
D. Yes. Sarah is not permitted to accept funds from a client without the presence of her immediate supervisor.

Answer 26

Answer : B

Explanation:
Yes. Sarah is required to explain the concepts of breakpoints and letters of intent to her client and her failure to do so is a violation of FINRAs rules of conduct. A registered representative selling mutual fund shares is required to explain the salient facts contained in a funds prospectus to a client before selling him the fund shares. Sarahs failure to do so is deemed inconsistent with just and equitable principles of trade.

Question 27

The difference between a “redemption fee” and a “rear-end load” is that:
A. the redemption fee is another name for a 12b-1 fee, which is an annual expense associated with the fund.
B. a rear-end load is used to compensate a salesperson who has sold shares of the fund; a redemption fee is charged to offset the expenses a fund incurs in processing share redemptions.
C. the redemption fee refers to charges incurred by the fund when it sells securities it owns; the rear-end load is a fee that is incurred by investors in the fund when they redeem their shares of the fund.
D. There is no difference. These are synonymous terms.

Answer 27

Answer : B

Explanation:
The difference between a redemption fee and a rear-end load is that a rear-end load is used to compensate a salesperson who has sold shares of the fund, while a redemption fee is charged to offset the expenses a fund incurs in processing share redemption

Question 28

Your client, Mr. Whiff, knows nothing about investment companies, and you are educating him about the advantages of investing through one, rather than investing in individual stocks and bonds.
Which of the following statements could get you in trouble?
A. “In investing through an investment company you will be able to invest a small amount of money and achieve greater diversification than you could otherwise.”
B. “Investing through an investment company will result in a lower tax bill than had you invested in individual stocks and bonds.”
C. “An investment in an investment company gives you an undivided interest in the company, in proportion to the number of shares you own.”
D. By investing your money through an investment company, you are getting the benefit of professional management.”

Answer 28

Answer : B

Explanation:
The statement that could get you in trouble is, Investing through an investment company will result in a lower tax bill than had you invested in individual stocks and bonds.
Improved tax planning is not a benefit of investing through an investment company since the funds manager cannot make investment decisions based on the tax status of each of the funds shareholders. An investor who actively manages his own portfolio is better able to lower his tax bill.

Question 29

Regulation D:
I. enables smaller firms to raise capital more quickly and more cheaply.
II. exempts the issuing firm from all disclosure requirements as long as the issue is being sold to no more than five investors.
III. has restrictions regarding the resale of the securities being sold.
A. I only
B. I and II only
C. I and III only
D. I, II, and III

Answer 29

Answer : C

Explanation:
Only Selections I and III are accurate statements regarding Regulation D. Regulation D enables smaller firms to raise capital more quickly and more cheaply, but it also restricts the resale of the securities being sold in a Regulation D offering. It does not exempt the issuing firm from all disclosure requirements, even if the issue is being sold to only a single investor. The disclosure requirements are minimal with a Regulation D offering, however.

Question 30

Which of the following would not be required to display prominently the name of the member firm issuing it?
I. sales literature distributed to an institutional investor
II. correspondence by a registered representative with her client
III. an advertisement to recruit new registered representatives
A. I only
B. I and II only
C. III only
D. I, II, and III

Answer 30

Answer : C

Explanation:
Only an advertisement to recruit new registered representatives is not required to display prominently the name of the member firm issuing it.

Question 31

Patty Planner has been contributing a sum to a non-qualified variable annuity each month for the last fifteen years in order to reach her ultimate goal of an early retirement. Now that she has turned 60, Patty has decided to retire. Her annuity is now worth $69,000, and her total contributions were $36,000. Patty decides to withdraw $15,000 of her accumulation as a lump sum to fund an extended vacation to Europe that she has always promised herself.
Which of the following statements applies to Pattys situation?
A. Her $15,000 withdrawal will be taxed as capital gain income, at a preferential rate, but she will also have to pay a 10% penalty for withdrawing the funds prior to turning 62.
B. Her $15,000 withdrawal will be taxed as ordinary income to her at her marginal tax rate.
C. Her $15,000 withdrawal is not taxable since it is less than the amount of her total contributions to the plan, but she will be subject to a 10% penalty for early withdrawal.
D. Her $15,000 withdrawal will be taxable as ordinary income to her at her marginal tax rate, and she will also be subject to a 10% penalty for early withdrawal.

Answer 31

Answer : B

Explanation:
If 60-year-old Patty has contributed $36,000 to the annuity that is now worth $69,000 and decides to withdraw $15,000 as a lump sum, the $15,000 will be taxed as ordinary income.
She will not be subject to any penalties for early withdrawals since she is over 59 years old, but the IRS uses LIFO-last-in/first-out-accounting in determining whether the income is taxable, so the $15,000 withdrawal will be considered to come from earnings, which have grown tax-free and are, therefore, now taxable.

Question 32

In mid-September, the stock of Amazon.com, Inc. (AMZN) is selling for $147.A January call option on the stock is selling for $6.10 and has a strike price of $160. This call option is:
A. at the money.
B. in the money.
C. out of the money.
D. overpriced. No one should pay $6.10 for the right to buy a share of stock for $160 when its current market price is only $147.

Answer 32

Answer : C

Explanation:
If Amazon.com is selling for $147 and the strike price on the option is $160, the call option is said to be out of the money since, even if an investor were given the option free, he would not benefit from exercising it at this time. If he did so, he would be paying $160 for a stock that is selling for only $147 on the open market. Even so, the option is not necessarily overpriced at $6.10 because the option has what is known as time value on it. The stock of Amazon.com has several months during which it could rise well above the $160 strike price on the option.

Question 33

Tex Payor owns 500 shares of Amazon.com, Inc. that he bought seven years ago when the stock price was $18 a share, at which time he paid a commission of $12.95 to purchase the stock. At the beginning of this year, Amazon was selling for $89 a share. Today, December
31st, Amazons stock closed at $152 a share.
Based on this information, what must Tex include on this years tax return as taxable income from his investment in Amazon?
A. only the capital appreciation on the stock this year: $63 a share x 500 shares = $31,500
B. the value of the stock on December 31st minus the price he paid for it, which includes the commission he paid, divided by the 7 years he has owned the stock: $152 - ($18 + $12.95) x 500 shares = $60,525 7 = $8,646
C. the capital appreciation on the stock this year minus the commission he originally paid to purchase the stock:($63 - $12.95) x 500 = $25,025
D. none of the above

Answer 33

Answer : D

Explanation:
None of the selections is the amount that Tex must include as taxable income on this years tax return from his investment in Amazon. Until Tex sells his shares of Amazon.com, he has earned only unrealized capital gains, which are not subject to taxation. When Tex sells his shares, he will then have realized capital gains and must pay tax on those gains.

Question 34

The total of a mutual fund’s front-end load, rear-end load, and 12b-1 fees may not exceed:
A. 10.0% of the fund’s offer price.
B. 10.0% of the fund’s net asset value.
C. 8.5% of the fund’s offer price.
D. 8.5% of the average annual net assets of the fund.

Answer 34

Answer : C

Explanation:
The total of a mutual funds front-end load, rear-end load, and 12b-1 fees may not exceed
8.5% of the funds offer price

Question 35

NASDAQ is:
A. an acronym for Norway’s major stock exchange.
B. the government organization that insures accounts at U.S. brokerage firms.
C. a computerized system that links together the U.S. regional exchanges.
D. a computerized quotation system used in the over-the-counter market.

Answer 35

Answer : D

Explanation:
NASDAQ is a computerized quotation system that is used in the over-the-counter market. It allows NASDAQ market makers to enter bid and ask quotes and allows subscribers at lower levels to view the bid and ask quotes av

Question 36

HiTop Investments main office is located in the state of Colorado. A registered representative of the firm sent out an e-mail to his clients, some of whom reside in other states, promoting the firms Colorado Municipal Bond Fund, which invests exclusively in bonds offered by the state and local governments of Colorado. In the e-mail, the representative states, These bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists.
Is this e-mail in violation of any securities laws?
A. No. Since the fund invests exclusively in bonds offered by the state and local governments of Colorado, the representatives statement contains no misstatement of fact.
B. Yes. Advertisements referring to a specific fund may not be distributed by electronic means.
C. Yes. A fund that invests only in bonds offered by state and local governments of one state may not be sold to investors who reside in other states.
D. Yes. The representatives statement that the bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists, is untrue.

Answer 36

Answer : D

Explanation:
Yes, the e-mail is in violation of the Securities Act of 1933 because the representatives statement that the bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists, is an untrue statement of a material fact.
Although the income will be free from federal taxation, residents of states other than
Colorado will likely be required to pay state and local income taxes on the interest earned.
It is not illegal to sell municipal bonds to investors in other states or to distribute advertisements by electronic means.

Question 37

Brian is single and 32 years old. He is employed as a buyer for a large sporting goods retail chain and participates in an employer-matched 401(k) plan. He remembers hearing about the benefits of passively managed portfolios in a college investments course he took.
Therefore, he is directing 100% of his 401(k) monies into an S&P 500 Index fund. He has also been investing all of his discretionary income into a regular account with the same
S&P 500 Index fund. Brians goal is to retire no later than his 55th birthday.
Is this the best investment strategy for him?
A. Yes. He is investing in a diversified portfolio of stocks that is passively managed, so he isnt having to pay big management fees.
B. Yes. Because index funds are passively managed, they dont have as high a turnover rate, and lower turnover rates result in lower tax bills for the investor. Brian gets diversification and a lower tax bill.
C. No. The S&P 500 Index consists only of large, domestic stocks, so Brian isnt as diversified as he could be, and his investments may not grow fast enough for him to retire on his 55th birthday.
D. Both A and B are reasons that Brian’s strategy is the best strategy for him.

Answer 37

Answer : C

Explanation:
No, investing all of his retirement savings and all his discretionary income into the same
S&P 500 Index fund is not the best strategy for Brian because the S&P 500 Index consists only of large domestic stocks, so Brian isnt as diversified as he could be, and his investments may not grow fast enough for him to retire on his 55th birthday. Although the
S&P 500 Index fund is passively managed, which results in lower management fees and lower tax bills, Brian could spread his money among other index funds that offer these same benefits as well. For example, he could invest in a small cap index fund, a mid-cap index fund, and even a foreign stock index fund, such as an EAFE Index fund. This would give him even more diversification potential, and since the stocks in which these funds invest are a bit riskier, the funds offer a higher expected return, which should advance him toward his retirement goal more quickly. Brians investment horizon is sufficiently long for him to be able to handle the risk. Furthermore, investing all of ones money in a single fund- even a single S&P 500 Index fund-isnt the best strategy, especially if one has a lot of money to invest as Brian does. Not all S&P 500 Index funds perform equally well.

Question 38

A FINRA member who is a principal underwriter under the definition provided in the
Investment Company Act of 1940 is permitted to sell variable contracts through another broker-dealer only if:
I. the broker-dealer is also a FINRA member.
II. there is a sales agreement in effect between the underwriter and the broker-dealer.
III. the broker-dealer is also a principal underwriter as defined by the Investment Company
Act of 1940.
A. either I or II is true.
B. both I and II are true.
C. all three statements-I, II, and III-are true.
D. any one of the three statements-I, II, or III-are true.

Answer 38

Answer : B

Explanation:
A FINRA member who is a principal underwriter under the definition provided in the
Investment Company Act of 1940 is permitted to sell variable contracts through another broker-dealer only if both statements I and II are true. The broker-dealer must also be a
FINRA member, and there must be a sales agreement in effect between the underwriter and the broker-dealer.

Question 39

Which of the following would be the most suitable investment for a client who has retired and needs some current income to augment her social security check?
A. growth fund
B. variable life policy
C. money market fund
D. U.S. government bond fund

Answer 39

Answer : D

Explanation:
Of the choices provided, the most suitable investment for a client who has retired and needs some current income to augment her social security check would be a U.S. government bond fund. The growth fund is mostly invested in stocks that provide their return in the form of capital appreciation, not dividend income. The variable life policy would not offer her the current income she needs and may even have a surrender charge.
Furthermore, these policies are insurance, not investments. A money market fund is good for capital preservation and some of her funds should be invested in a money market fund to meet this objective, but it will not provide her with current income. A U.S. government bond fund is less risky than other bond funds–although its value will fluctuate with interest rate changes-and will provide her with the supplemental income she requires.

Question 40

Which of the following are duties of the specialist on an exchange floor?
I. executing limit orders if/when the limit price specified is reached
II. minimizing any imbalance in supply and demand for the stock(s) that the specialist is assigned
III. determining an opening price for each assigned stock every day
IV. serving as an auctioneer for the shares of the assigned stocks
A. I and II only
B. I, II, and IV only
C. I and IV only
D. I, II, III, and IV

Answer 40

Answer : D

Explanation:
All of the choices listed are duties of the specialist on an exchange floor. The specialist maintains a limit order book and executes those orders if/when the limit price is reached.
The specialist is also charged with maintaining a fair and orderly market in the assigned securities, which means trading on his own account to ensure that the supply and demand of the stocks shares match. Additionally, the specialist is responsible for setting the opening price for the assigned stock each day and for serving as the auctioneer for the shares of the stock.

Question 41

Ari Gaunt was affiliated with Savvy Investments and was terminated after some of the female representatives associated with Savvy filed sexual harassment complaints against him. Mr. Gaunt believes that he is still due money for some transactions he executed prior to his termination; Savvy believes otherwise. Under FINRAs Code of Arbitration:
A. Ari may either sue Savvy in a civil court of law or submit his claim to arbitration.if Ari submits his claim for arbitration and is unhappy with the panels decision, he can then sue
B. Ari has six years to submit his claim to arbitration.
C. both B and C are true statements.

Answer 41

Answer : C

Explanation:
If Mr. Gaunt believes he is still due money from Savvy, and Savvy disagrees, Ari has six years to submit his claim to arbitration under FINRAs Code of Arbitration. Ari cannot sue
Savvy in a court of law, and the decision of the arbitration panel is final.

Question 42

Dottie is a newly-minted, registered representative and is doing some cold calling to line up appointments with prospects. When doing so, Dottie:
I. must not call anyone on her firms do-not-call list.
II. must not call anyone on the FTCs national do-not-call-list.
III. must not call anyone before 7 a.m. or after 7 p.m., based on the time zone of the person being called.
IV. must provide the person called with her name, the name and contact information of her firm, and the purpose of her call.
A. I and III only
B. I and IV only
C. I, II, and IV only
D. I, II, III, and IV

Answer 42

Answer : C

Explanation:
Only Selections I, II, and IV are correct. When Dottie does her cold calling, she must not call anyone listed on either her firms do-not-call list or the FTCs national do -not-call list, and she must provide the person called with her name, the name and contact information of her firm, and the purpose of her call. Under FINRAs telemarketing rules, she must not call anyone before 8 a.m. or after 9 p.m., based on the time zone of the person being called

Question 43

Which of the following is not one of the rules stipulated by the Securities Exchange Act of
1934?
A. All securities’ exchanges and SROs are required to register with the SEC.
B. All brokers and dealers are required to be members of a national securities association.
C. Investment companies are prohibited from using any sales literature that contains an omission of a material fact.
D. Firms are required to send copies of their annual reports to investors before an annual meeting at which directors are to be elected.

Answer 43

Answer : C

Explanation:
The rule prohibiting investment companies from using any sales literature that contains an omission of a material fact is not one of the rules stipulated by the Securities Exchange Act of 1934. This involves the market for new securities and, as such, is a rule stipulated by the
Securities Act of 1933. The 1934 Act deals with the secondary market.

Question 44

Marshalls employer offers a 403(b) plan, and Marshall must decide into which of several mutual fund alternatives the contributions will be invested.
Regardless of other factors, which of the following would clearly not be a good choice?
A. a municipal bond fund
B. a fund that invests in stocks that are expected to experience high growth
C. a fund that invests almost exclusively in high-tech stocks
D. a fund that invests in both foreign and domestic stocks

Answer 44

Answer : A

Explanation:
A municipal bond fund is clearly not a good investment choice for a 403(b) plan. Earnings in a 403(b) plan grow tax-deferred, so Marshall would not be receiving the tax-free income benefits offered by a municipal bond fund. All he would be receiving is a lower return on h

Question 45

Which of the following is an example of a primary market transaction?
A. Exco Resources (XCO) sells a new issue of 7.5%, 8-year notes.
B. Ms. Talker calls her broker and places a market order to sell shares of AT&T (T) on the NYSE.
C. Mr. Safe purchases a Treasury bill with two weeks remaining to maturity.
D. Mr. Green places an order to buy shares of Sunvalley Solar, Inc. (SSOL), a stock selling on the OTC Bulletin Board.

Answer 45

Answer : A

Explanation:
Exco Resources new bond issue is a primary market transaction. The primary market refers to the market for new issues. The other three scenarios describe transactions in securities that are already being traded and are secondary market transactions.

Question 46

Mandatory guidelines for the prospectuses of which of the following are dictated by the
Investment Company Act of 1940?

I. mutual funds -
II. closed-end investment companies

III. unit investment trusts -

IV. variable contracts -
A. I and II only
B. II only
C. I, II, and III only
D. I, II, III, and IV

Answer 46

Answer : D

Explanation:
Mandatory guidelines for the prospectuses of all of the selections are dictated by the
Investment Company Act of 1940.

Question 47

The dividends distributed by which of the following are taxed as ordinary income?
A. mutual funds
B. closed-end investment companies
C. IBM
D. real estate investment trusts

Answer 47

Answer : D

Explanation:
The dividends distributed by real estate investment trusts are taxed as ordinary income.
Dividends on all of the other choices are subject to preferential tax treatment under current ta

Question 48

The Securities Exchange Act of 1934:
I. regulates the market for new issues.
II. delineates the registration requirements for investment advisers.
III. regulates secondary market activities.
IV. requires that officers and some other employees of member firms submit their fingerprints to the U.S. attorney generals office.
A. I and II only
B. II and III only
C. III and IV only
D. I, II, III, and IV

Answer 48

Answer : C

Explanation:
Only Selections III and IV accurately describe provisions of the Securities Exchange Act of
1934. The Securities Exchange Act of 1934 provides for the regulation of secondary market activities. One section of the Act (Rule 17f-2) requires that officers and some other employees of member firms submit their fingerprints to the U.S. attorney generals office.
The Securities Act of 1933 regulates the market for new issues, and the Investment
Advisers Act of 1940 delineates the registration requirements for investment advisers.

Question 49

A feature that gives a bondholder or the owner of preferred stock of a corporation the option to exchange his security for shares of the common stock of the firm is called a:
A. call feature.
B. warrant.
C. convertible feature.
D. right.

Answer 49

Answer : C

Explanation:
A convertible feature on a bond or preferred stock gives the bondholder or the preferred stock owner the option to exchange the security he owns for shares of common stock of the firm.

Question 50

Ralph has a traditional IRA from which he has yet to make any withdrawals. Ralph will be turning 70 in June, 2011.According to the required minimum distribution rule associated with traditional IRAs, Ralph is required to start withdrawing funds from this account:
A. no later than the day after he turns 70 ½.
B. on April 15, 2011.
C. on April 1, 2012.
D. on April 15, 2012

Answer 50

Answer : C

Explanation:
According to the required minimum distribution rule associated with traditional IRAs, Ralph is required to start withdrawing funds from this account on April 1, 2012. The rule states that he must begin making withdrawals on April 1st of the year following the year in which he turns 70 .

Question 51

Which of the following securities laws regulates the organizational structure and day-to-day operations of investment companies?
A. The Securities Act of 1933
B. The Securities Exchange Act of 1934
C. The Investment Company Act of 1940
D. The Investment Advisers Act of 1940

Answer 51

Answer : C

Explanation:
The Investment Company Act of 1940 regulates the organizational structure and day-to- day operations of investment companies. The Act includes requirements regarding a funds capital structure, the custody of its assets, its investment activities, and the duties of a funds board of directors, among other things. The Securities Act of 1933 regulates the offering of a funds shares and requires that prospective investors be provided with a prospectus. The Securities Exchange Act of 1934 regulates secondary market activities in investment company shares and includes laws governing the principal underwriters and brokers and dealers who sell investment company shares. The Investment Advisers Act of
1940 regulates investment advisers and includes laws pertaining to their registration and recordkeeping, custodial, and reporting respon

Question 52

Eddie and Edith open a JTWROS account with you. This means that:
I. You can accept a buy or sell order from either Eddie or Edith.
II. Any check that is drafted upon a request to withdraw funds can be written to either Eddie or Edith, or both.
III. If either Eddie or Edith die, the account assets will pass to that individuals estate, based on his or her percentage ownership of the account.
IV. Correspondence concerning the account can be sent to either Eddie or Edith.
A. I only
B. I and II only
C. I and IV only
D. I, II, III, and IV

Answer 52

Answer : C

Explanation:
Only Selections I and IV are true statements. If Eddie and Edith open a JTWROS account with you, you can accept a buy or sell order from either one of them, and any correspondence concerning the account can be sent to either one of them. However, a check must be made out to both of them, in the same manner that the account is titled. A
JTWROS account is a joint tenants with rights of survivorship account, which means that if either Eddie or Edith die, the account assets pass directly to the other one and do not go into the deceaseds estate.

Question 53

Ms. Mix always assures her clients that she will be calling them with quarterly recommendations for rebalancing their portfolios if there are any changes that she feels are appropriate. This has worked out well for her pocketbook since she has always been able to tweak each of her clients investment portfolios a little each quarter by recommending that they redeem their shares in one fund that hasnt performed as well in the last quarter and use the proceeds to invest in another that has. Her clients feel cared for since she is in such regular contact with them.
Is Ms. Mix violating any securities regulations with this policy of hers?
A. No. Ms. Mix is merely providing good service to her customers.
B. Yes. Mutual funds are not designed to be short-term investments.
C. It depends. There is no violation as long as her clients’ portfolios are increasing in value.
D. Yes. Any recommendation that benefits a registered representative is deemed to be in violation of FINRAs rules regarding fair dealing.

Answer 53

Answer : B

Explanation:
Yes. Mutual funds are not designed to be short-term investments, and Ms. Mix should not be calling her customers quarterly with rebalancing recommendations. Even if one fund has outperformed another in a particular quarter, there is no guarantee that this will happen in the next quarter. This violation falls under FINRAs rules regarding the trading of mutual fund shares, even if the trading results in an increase in the clients portfolio values. Ms.
Mix can certainly call her clients each quarter to see if they have any questions or concerns or to say hello; her clients will still feel cared for. It is not a violation for a registered representative to make a recommendation that benefits her as well as her clients as long as the recommendation is made to benefit the client first and foremost.

Question 54

A load mutual fund offers reduced load charges when an investor invests over $25,000 in the fund.
Which of the following can combine their funds in order to meet that breakpoint and get the reduced sales charge?

I. Mr. and Mrs. Smith -
II. Mrs. Smith and her 8-year-old daughter, Susie
III. Mr. Smith and his brother, Darwin
IV. The Smithereen Investment Club, of which Mr. and Mrs. Smith are co-chairpersons
A. I only
B. I and II only
C. I, II, and IV only
D. I, II, and III only

Answer 54

Answer : B

Explanation:
Only Mr. and Mrs. Smith and Mrs. Smith and her 8-year-old daughter, Susie, can combine their funds in order to meet the breakpoint and get the reduced sales charge. Investments made by a husband and a wife and by a parent on their own account and on a custodial account for a minor child can be combined toward the total needed to reach the breakpoint.
(The child cannot be an adult, however.) Investments made by siblings and investment clubs cannot be combined to meet a breakpoint.

Question 55

A brochure advertising the Stocks4U Mutual Fund contains an example illustrating how much an investor who had invested $10,000 with the fund ten years ago would have in his account today, using the funds historical return data, to illustrate the principle of compound interest. An example of this nature:
A. is expressly in violation of FINRA rules.
B. may be used only if there actually was such an investor on record.
C. may be used as long as there is a clear statement that the illustration in no way predicts or projects what an investor who invests $10,000 today would have in his account in ten years.
D. may be used only if the fund is expecting to be able to duplicate these returns over the next decade.

Answer 55

Answer : C

Explanation:
The brochure may contain an example illustrating how much an investor who had invested
$10,000 with the fund ten years ago would have in his account today as long as there is a clear statement that the illustration in no way predicts or projects what an investor who invests $10,000 today would have in his account in ten years. Hypothetical illustrations are permitted.

Question 56

The AGRO Mutual Fund invests in aggressive growth stocks of midcap corporations. The fund is running an advertisement on the radio that informs the listeners that AGRO earned a 22% return last year while the S&P 500 Index returned only 10%. The ad also contains information regarding how an interested investor can contain a fund prospectus.
Has AGRO violated any securities laws with this advertisement?
A. No. This would be considered a generic advertisement and not an offer to sell.
B. No. In addition to providing the listeners with its own return last year, AGRO appropriately provided the listeners with a benchmark return; thus there has been no violation of any laws.
C. Yes. Although AGRO provided the return on the S&P 500 as well as its own return, the S&P 500 Index is comprised of average risk stocks and is not an appropriate benchmark for AGRO to use.
D. Yes. AGRO is required to provide information on the specific investments it made to earn that 22% return, given that the return is unusually high.

Answer 56

Answer : C

Explanation:
Yes. When AGRO runs an advertisement that informs the listeners that it earned a 22% return last year while the S&P 500 Index returned only 10%, it has violated securities laws because although the fund provided the return on the S&P 500 as well as its own return, it failed to mention that the S&P 500 Index is comprised of large company stocks of average risk, which is not an appropriate benchmark for AGRO to use. The appropriate index is one comprised of similar stocks, such as the Russell Mid-Cap Growth Index. Furthermore, any advertisement referencing past returns must contain a statement that past performance is not indicative of future performance.

Question 57

Ms. Newbie, a newly-minted registered representative with Savvy Investments, just had her first client walk through the door. Before she can do anything, Ms. Newbie must obtain which of the following pieces of information from her client?
A. age
B. occupation
C. taxpayer identification number (TIN)
D. investment objectives

Answer 57

Answer : A

Explanation:
Before she can do anything, FINRA requires that she ensure that her client is of legal age.
Ms. Newbie must also make a reasonable effort to determine occupation, TIN, and investment objectives, and if her client refuses, Ms. Newbie must document the fact that she made an effort to obtain this information.

Question 58

Ken has a variable life policy and recently learned that he can borrow against its cash value to help pay for some of the expenses hes incurring while pursuing a graduate degree.
Which of the following statements about the loan he can get is true?
A. Ken can borrow at most only 50% of the cash value, and only as long as hes had the policy for at least three years.
B. Since Ken is essentially borrowing his own money; the loan is interest-free.
C. Ken never has to repay the loan, but if he chooses not to do so, his wife, Barbie, wont get as much when he dies.
D. Ken has been misinformed. He cannot borrow against the cash value of a variable life policy because the cash values of these policies fluctuate constantly.

Answer 58

Answer : C

Explanation:
The true statement is that Ken never has to repay the loan, but if he chooses not to do so, his wife, Barbie, wont get as much when he dies. He can borrow up to at least 75% of the cash value, but there is interest charged on the loan. (In essence, hes paying interest to himself, though.)

Question 59

Paul is 36 years old and is married with two children, ages eight and ten. Paul lays carpet for a living, working as an independent contractor, and earns about $35,000 a year. His wife, Paula, is 33 years old, drives a school bus and earns only $18,000 a year, but her job provides the family with low-cost health insurance. They live conservatively and barely make ends meet. Paula recently inherited $180,000, however, and the couple would like to invest it, with the goal that they can both retire when Paul turns 62. The inheritance also included an educational endowment for their children, so they will not have to worry about saving for their childrens college educations.
Which of the following would not be a suitable recommendation for the allocation of their investment monies?
A. municipal bond fund
B. aggressive growth stock fund
C. Roth IRA
D. life insurance

Answer 59

Answer : A

Explanation:
Given that their combined income is only $53,000, Paul and Paulas marginal tax rate is low, so a municipal bond fund would not be a good recommendation for the allocation of their investment monies. Municipal bonds offer lower returns, and the couple would get little or no benefit from the tax-free interest income that these bonds provide. Their investment horizon is long enough (26 years) for them to invest some of their money in an aggressive growth stock fund, which has higher risk but also provides the higher expected returns that they may need to be able to retire when Paul turns 62. A Roth IRA is preferred over a traditional IRA in their situation. Although the traditional IRA would allow them to deduct their contributions, they already pay little or no taxes. Contributions to a Roth IRA are made out of after-tax income, but the contributions themselves can be withdrawn at any time without penalty if Paul and Paula run into some unexpected expenses, and the earnings grow tax-deferred and will be completely tax-free if they make no withdrawals until the age of 59 . Given the ages of their children, a life insurance policy that will help provide for them if one or both of the parents die, should be strongly recommended.

Question 60

The premiums paid on which of the following are paid into the general account of an insurance company?

I. whole life -

II. universal life -

III. term life -

IV. variable life -
A. I only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV

Answer 60

Answer : C

Explanation:
Only the premiums paid on whole life, universal life and term life are paid into the general account of an insurance company. Variable life premiums go into the separate account.

Question 61

Ms. Pye has quit her job to become a full-time mother and wants to roll over the funds from
A. this is unwise since she will have to pay both taxes and a penalty on the funds that are rolled over.
B. if she has the funds transferred directly from her 401(k) plan to the IRA, she will avoid having 20% withheld.
C. if she opts to take possession of the funds herself prior to depositing them in the IRA account, she must make the deposit within 30 days to avoid a 10% penalty.
D. both B and C.

Answer 61

Answer : B

Explanation:
If Ms. Pye wants to rollover the funds from her 401(k) plan into an IRA, you should tell her that if she has the funds transferred directly from her 401(k) plan to the IRA, she will avoid having 20% withheld. She will not have to pay either taxes or a penalty on the funds that are rolled over if she follows specified guidelines, and if she opts to take possession of the funds herself prior to depositing them in the IRA account, she has 60 days in which to do so before a 10% penalty is assessed.

Question 62

Mr. Fast Lane met an early death at the age of 42. Mr. Lane had been making contributions to a variable annuity contract for several years, and at the time of his death, his contributions totaled $25,000. Although the value of the contract had at one time reached
$40,000, earnings included, a downturn in the market has resulted in a contract value of only $23,000.
How much will Mr. Lanes beneficiaries receive as the death benefit associated with this contract under these circumstances?
A. nothing, since the contract now has a value that is less than Mr. Lanes total contributions
B. the average of what its value once was and what it is today: $31,500
C. $25,000
D. $23,000

Answer 62

Answer : C

Explanation:
Since Mr. Lane died while he was still making contributions, his beneficiaries will receive
$25,000. If the annuitant dies during the accumulation period, the death benefit is equal to the value of the contract or the total of the contributions, whichever is greater.

Question 63

Joan is a customer of GetErDone Broker-Dealers. Her twin sister, Jean, has accompanied her to GetErDones office and has gathered some information regarding opening an account with the firm, giving it her contact information at the same time.
Under Regulation S-P, which of the following statements regarding GetErDones handling of Joans and Jeans personal information is true?
A. GetErDone must provide Joan with a notification of its privacy policies annually and provide her with information on how to mandate that it not share her nonpublic personal information with nonaffiliated third parties.
B. GetErDone can disclose any information that Jean provided them to nonaffiliated third parties since Jean is not a customer of the broker-dealer.
C. GetErDone is required to have provided Jean with a copy of its privacy policy when she inquired about opening an account with the broker-dealer.
D. All of the above are true statements.

Answer 63

Answer : A

Explanation:
Since Joan is a customer of GetErDone, GetErDone must provide her with a notification of its privacy policies annually and provide her with information on how to mandate that it not share her nonpublic personal information with nonaffiliated third parties. GetErDone may not disclose any information about Jean, who is not yet a customer of the firm, unless the broker -dealer has provided Jean with its privacy policy and given her the opportunity to opt out of its ability to share her information with nonaffiliated third parties. GetErDone is not required to have provided Jean with a copy of its privacy policy when she inquired about opening an account, but it will need to provide her with one when/if she becomes a customer.

Question 64

Mr. B. Beard started making regular investments in a mutual fund with the goal of financing a five-year circumnavigation on his 40-foot sailboat, Pirates Lady. He is getting ready to depart and wants to set up an automatic withdrawal plan such that the money he has invested will see him through his circumnavigation, with nothing remaining in the account at the end.
Which of the systematic withdrawal plans will best fit his needs?

C. fixed-percentage plan -

D. fixed-share plan -
A. fixed-time plan
B. fixed-dollar plan

Answer 64

Answer : A

Explanation:
Since Mr. Beard wants an automatic withdrawal plan such that the money will last through his circumnavigation, with nothing remaining at the end, he should elect to use the fixed - time plan. Under this plan, the fund determines how much it will redeem each period over the five years such that the account is depleted at the end of that time period. There is no way of knowing exactly how long Mr. Beards money will last under the other three types of plans; it could be greater than or less than 5 years–or exactly 5 years for that matter.

Question 65

Tex Payor is an investor in the Invest4U Mutual Fund. The manager of the fund, fearing a substantial decline in the stock market, sold a lot of the funds holdings to lock in profits. As a result, the fund earned a lot of long-term capital gain income.
Which of the following statements is true regarding the tax treatment of this income?
A. Tex must pay taxes on that portion of the long-term capital gain income that Invest4U distributes to him.
B. Tex must pay taxes on his proportionate share of the long-term capital gain income earned by Invest4U, whether distributed or not.
C. Tex must pay taxes only on dividend income distributed by Invest4U.The mutual fund itself pays tax on any capital gains it earns.
D. None of the above is a true statement.

Answer 65

Answer : A

Explanation:
Tex must pay taxes on that portion of the long-term capital gain income that Invest4U distributes to him. Invest4U is required to distribute at least 98% of its capital gain income to its shareholders.

Question 66

Anna Lyst observes that the beta of a certain stock is 0.8. This means that:
A. if the S&P 500 Index loses 10%, this stock can be expected to lose 8%.
B. the stock is 80% more volatile than the S&P 500 Index.
C. if the S&P 500 Index is up 10%, this stock can be expected to lose 8%.
D. the stock is riskier than the overall market.

Answer 66

Answer : A

Explanation:
If the beta of a stock is 0.8, it means that if the S&P 500 Index loses 10%, this stock can be expected to lose 8%. Beta is a measure of how a stock or a portfolio of stocks moves with the overall market, and the S&P 500 Index is commonly used as a proxy for the overall market. A beta of 0.8 means that the stock is less risky than the market, which has a beta of 1.0.

Question 67

Which of the following is not a potential advantage associated with investing through a mutual fund?
A. lower cost associated with portfolio management
B. simplified recordkeeping
C. price discovery
D. diversification

Answer 67

Answer : C

Explanation:
Price discovery is not a potential advantage associated with investing through a mutual fund. The net asset value of the fund determines its price, not the interaction of buyers and sellers in the market. All the other choices are advantages of investing through a mutual fund.

Question 68

Joe Cool is a member of the All Greek Fraternity. A few of the alumni of his fraternity sat for the FINRA Series 6 exam over the past couple of years and, using their cell phones, took pictures of the exam questions. They forwarded these to their fraternity to be included in the test bank file the fraternity keeps in its study room.
Have there been any violations of FINRA/NASD rules in this instance?
A. No. It is standard practice for sororities and fraternities to compile test banks of old exams, and since the forwarded tests are not copies of an actual future exam that will be administered, there has been no violation of any rules.
B. Yes. It is a violation of Rule 2110 for an exam-past or present-to be reproduced and distributed for study purposes.
C. No. Rule 2110 only prohibits the reproduction and distribution of a previously administered FINRA exam for study purposes if the exams are being sold. As long as there is no compensation involved, a violation has not been committed.
D. Both A and C are true statement

Answer 68

Answer : B

Explanation:
Yes, there have been violations of FINRA/NASD rules in this instance. It is a violation of
Rule 2110 for an exam-past or present-to be reproduced and distributed for study purposes. Whether there has been compensation paid or not is irrelevant.

Question 69

The Invest4U Mutual Fund is a regulated investment company under Internal Revenue
Code Subchapter M. This means that:
A. Invest4U must submit an annually-updated prospectus to the IRS as well as to the SEC.
B. Invest4U does not itself have to pay taxes on any dividend or capital gain income it receives and distributes to its shareholders.
C. Invest4U is a UIT.
D. Invest4U is a non-diversified management company.

Answer 69

Answer : B

Explanation:
A regulated investment company under Internal Revenue Code Subchapter M is one that does not itself have to pay taxes on any dividend or capital gain income it receives and distributes to its shareholders. There is no requirement that it file an updated prospectus with the IRS, nor that it be a non-diversified management company. By definition, a mutual fund is not a UIT.

Question 70

Which of the following securities would be exempt from SEC registration requirements?
I. a 15-year bond issued by the state of Colorado
II. an issue of preferred stock that has an aggregate par value of $5 million
III. an issue of commercial paper that has a 5-month maturity
A. I only
B. III only
C. I and III only
D. I and II only

Answer 70

Answer : C

Explanation:
Only Selections I and III are exempt from SEC registration requirements. The bond issued by Colorado is exempt because bonds issued by a government body are exempt from registration. The issue of commercial paper is exempt because securities with less than
270 days to maturity are exempt from registration.

Question 71

Marge is 57 and wants to retire early. Since she is not yet eligible for social security, she wants to begin tapping a variable annuity to which she has been contributing for the last 20 years.
Which of the following statements regarding her withdrawals is true?
A. There is no way that Marge can begin making withdrawals without facing a 10% penalty for early withdrawal unless she is disabled or needs the money for medical expenses.
B. Marge can begin her withdrawals tax-free and without penalty under IRS rule 72(t) as long as she does so following the specific guidelines until she turns 59 , at which point she will no longer have to follow the specific guidelines.
C. Marge can begin her withdrawals tax-free and without penalty under IRS rule 72(t) as long as she does so following the specific guidelines for a period of five years.
D. Marge can begin her withdrawals without penalty under IRS rule 72(t) as long as she does so following the specific guidelines for a period of five years; however, the withdrawals will be subject to taxation.

Answer 71

Answer : D

Explanation:
Since Marge is only 57, she can begin her withdrawals without penalty under IRS rule 72(t) as long as she does so following the specific guidelines for a period of 5 years, but the withdrawals will be subject to taxation. Once she starts the program outlined in rule 72(t), she must remain on it for at least five years or until she turns 59 , whichever comes last.
This means that although shes already 57 and will be turning 59 in 2 years, she will have to continue to follow the guidelines for a full five years, or until she turns 62, in this case.

Question 72

In 2008, Mr. Conservative bought a 1-year Treasury bill that was yielding 1.63%. The average annual rate of inflation in 2008 was 3.85%. In this case:
A. Mr. Conservative earned a nominal return of +3.85% on his T-bill investment.
B. Mr. Conservative earned a real return of -2.22% on his investment.
C. Mr. Conservative earned a real return of +1.63% on his investment.
D. Mr. Conservative earned a nominal return of +2.22% on his investment.

Answer 72

Answer : B

Explanation:
If Mr. Conservative bought a 1-year Treasury bill in 2008 that was yielding 1.63%, and the average annual rate of inflation in 2008 was 3.85%, Mr. Conservative earned a real return of -2.22 % on his investment. In other words, he lost 2.22% in purchasing power since the dollars he received when the bill matured were worth less than the dollars he paid to buy the bill. Real return = nominal return - inflation rate = 1.63% - 3.85% = -2.22

Question 73

Which of the following is not one of the purposes of FINRA as stated in its articles of incorporation?
A. maintain a fair and orderly securities market
B. encourage members to uphold high ethical standards
C. develop lines of communication between the securities industry and governmental agencies
D. police members and assist with dispute settle

Answer 73

Answer : A

Explanation:
FINRAs articles of incorporation does not state that one of FINRAs purposes is to maintain a fair and orderly securities market. All the other selections are stated purposes.
The articles of incorporation also state that FINRA has the power to write and enforce rules for its members to promote fair practices.

Question 74

Sams neighbor has just inherited some bonds from his uncle. The neighbor, knowing that
Sam is a registered representative with a brokerage firm, asks Sam if he would like to handle the sale of these securities. Sam agrees to do so and calls his existing clients with an offer to sell the bonds at a price that he researches to be the average ask price of dealers in the same bonds. In this situation:
A. Sam has engaged in the illegal practice of “front running.”
B. Sam has engaged in the illegal practice of “selling away.”
C. Sam has engaged in no illegal practices as long as he markets the bonds only to existing clients. This is referred to as a private placement.
D. Sam has engaged in no illegal practices since he is licensed to sell bonds and is doing so at an established ask price. Sam is a good neighbor.

Answer 74

Answer : B

Explanation:
If Sam sells his neighbors bonds by calling his existing clients with an offer to sell them the bond, he has engaged in the illegal practice of selling away. This practice is defined as a broker or agent offering securities for sale that are not owned or offered by his member firm and is in violation of NASD Rule 3040

Question 75

1A registered representative has hired a friend to design a website for his advisory business. Websites such as these are categorized as:
a. Correspondence
b. A Tombstone Advertisement
c. Retail Communications
d. Generic advertising

Answer 75

c. Retail Communications

Websites are categorized as Retail Communications. It does not matter if an individual or firm creates them; they are considered retail communications under FINRA 2210(c)(1)(A). A tombstone advertisement gives investors basic information about a public offering that will be available in the near future. Correspondence is defined as any electronic or written communication circulated or made available to 25 or less retail investors in any 30 calendar-day period under FINRA 2210(a). Generic advertising pertains to advertising that promotes a particular firm, or securities, but without specific recommendations.

Question 76

ACME Invest, Inc. registered with FINRA seven months ago. The company has created a billboard advertisement near the financial district in their city. When must the company file with FINRA advertising regulation?

Answer 76

a. 10 business days prior to first use

New FINRA member firms must file Retail Communications 10 business days prior to first use during their first year of operation. The one-year period begins on the date the FINRA membership is effective in the CRD system. After one year, Retail Communications can be filed within 10 business days of first use or publication under FINRA 2210(c)(1)(A).

Question 77

All of the following are exempt from registration under the Securities Act of 1933 EXCEPT:
a. US 10-year notes
b. Commercial paper with maturity less than 270 days
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c. Variable life insurance policies
d. Bankers acceptances with maturity less than 180 days

Answer 77

c. Variable life insurance policies

US government securities such as notes, bonds, and bills are exempt from registration. Commercial Paper is exempt too, provided the term is 270 days or less. Bankers Acceptances are also exempt, provided the term is 180 days or less. The majority of life insurance contracts are also exempt from registration, excluding contracts that carry investment risk, such as variable life and variable annuities.

Question 78

Jason is a Series 6 registered representative and is opening a new account. Jason MUST gather all of the following information at the time of account opening EXCEPT:

Answer 78

a. The customer’s choice to reinvest dividends or take them in cash

All are required to be gathered at the opening of the account except the customer’s choice to reinvest capital gains and dividends from their mutual fund investments. This data can be obtained later.

Question 79

All of the following retirees may contribute to a 457 plan EXCEPT:
a. A retired nonprofit executive
b. A retired city treasurer
c. A retired state construction worker
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d. A retired Delta Airlines pilot

Answer 79

d. A retired Delta Airlines pilot

457 plans are non-qualified, deferred compensation retirement plans offered to state, local government, and some nonprofit employees. Private sector employees do not contribute to 457 plans.

Question 80

Which of the following regulations applies to the anti-fraud provisions governing Municipal securities?
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a. The Securities Exchange Act of 1934
b. The Securities Act of 1933
c. The Investment Company Act of 1940
d. SEC Rule 135a

Answer 80

a. The Securities Exchange Act of 1934

While most Municipal securities are exempt from registration under the Securities Act of 1933, the anti-fraud provisions of the Securities Exchange Act of 1934 still apply to them. The Investment Company Act of 1940 focuses on mutual funds, hedge funds, holding companies, and other types of equity funds. SEC Rule 135c pertains to advertisements.

Question 81

Michaela is a long-term client of Jennifer’s and has a substantial mutual fund portfolio. Jennifer has explained that the markets may change soon, and a more conservative approach may benefit Michaela. However, Michaela will be traveling and does not want to spend time discussing portfolio adjustments with her advisor. Michaela wants Jennifer to make the necessary adjustments when she feels the time is right; without having to discuss it each time. What does Jennifer need to have on file?
a. A signed QIB
b. A signed LOI
c. A signed ODD check
d. A signed POA

Answer 81

d. A signed POA

Jennifer needs to have discretionary authority on this account. So, a limited Power of Attorney (POA) form signed by Michaela granting Jennifer discretionary authority to make adjustments on the portfolio is required. An LOI is a letter of instruction that broker-dealers use when receiving instructions from customers. A QIB is a qualified institutional buyer who receives less protection from securities market regulators since they are deemed to be sophisticated investors. An ODD is an options disclosure document published by the OCC (Options Clearing Corporation). It discloses the risks inherent in trading options.

Question 82

The NAV of XYZ Balanced Growth Mutual Fund is $12.85. The POP is $13.30. What is the sales charge percentage?
a. There is not enough information to determine the sales charge.
b. 6.76% check
c. 3.38%
d. 1.00%

Answer 82

c. 3.38%

The sales charge percentage can be calculated by this formula:
POP-NAV/POP 13.30 - 12.85 = 0.45. 0.45/13.30 = 3.38%

Question 83

Which of the following best describes a 12b-1 fee for an open-end mutual fund?
a. The front-end load on Class-B shares
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b. The annual marketing or distribution fee
c. The NAV divided by dividend yield
d. The breakpoint amount

Answer 83

b. The annual marketing or distribution fee

The 12b-1 fee is the yearly marketing or distribution fee of a fund. It covers the costs of selling mutual fund shares and/or providing services to shareholders. The breakpoint amount is the threshold where mutual fund load fees begin to decrease, as investment size increases. The front-end load is the sales charge on Class A mutual fund shares. Class B mutual fund shares charge a back-end load, not a front-end load. The NAV is the Net Asset Value, and the dividend yield are the total yearly dividends received divided by the NAV of the fund.

Question 84

All of the following must be included on a trade confirmation EXCEPT:
a. The CUSIP number (if one exists)
b. The address of the broker-dealer
c. The quantity of security bought or sold
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d. The name of the registered representative that executed the trade

Answer 84

All are required except the name of the representative that executed the trade. The name, address, and phone number of the broker-dealer must be included on the trade confirmation.

Question 85

Which of the following is not exempt from registration under the Securities Act of 1940?
a. GO bonds
b. Fixed annuities
c. Revenue Bonds
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d. Secondary equity offerings

Answer 85

d. Secondary equity offerings

Fixed annuities, GO (General Obligation) muni bonds, Revenue Bonds (a type of muni bond) are all exempt from registration. However, secondary offerings of corporate securities are not exempt and require registration

Question 86

Gregory is 63 1/2 years old and wishes to retire at 66. He has been a long-term client and has 95% of his portfolio in equity mutual funds, with a concentration in technology and growth. His portfolio has performed well over the last decade. His concern is that the bull market is maturing. Gregory does not want downside equity volatility to change his retirement plans and will need liquidity in a few years. Which of the following is the best suggestion for him?
a. Make no changes to the portfolio as the market has been rising steadily for a decade.
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b. Diversify the portfolio with lower beta stock funds, bond funds, and money market funds.
c. Sell all equity funds and allocate 100% into money market funds.
d. Buy put options on tech stocks.

Answer 86

b. Diversify the portfolio with lower beta stock funds, bond funds, and money market funds.

Gregory has only 2.5 years to retirement. The best choice is B as there should be more exposure to bonds and a focus on capital preservation versus growth. Lowering the beta of the stock funds could help. Making no changes is too risky, and selling all assets to cash is too conservative. Buying put options is most likely too risky and an inappropriate strategy.

Question 87

Regarding variable annuities, which of the following is true?
a. There are no surrender charges.
b. There is a guaranteed rate of return.
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c. The income generated is tax-deferred.
d. The insurance company assumes any investment risk.

Answer 87

c. The income generated is tax-deferred

Income from variable annuities is tax-deferred until one of two things happens: withdrawals begin, or the death benefit is paid to the investor (whichever comes first). Variable annuities have investment risk that the investor assumes, not the insurance company. There is no guaranteed rate of return in a variable annuity.

Question 88

Which of the following is true regarding nonsystematic risk?
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a. Nonsystematic risk can potentially be reduced by owning an index fund ETF.
b. Nonsystematic risk can be reduced by timing the market properly.
c. Nonsystematic risk cannot be reduced by diversification.
d. Nonsystematic risk is not present in an individual stock.

Answer 88

a. Nonsystematic risk can potentially be reduced by owning an index fund ETF.

Nonsystematic (unsystematic) risk pertains to the market risk of an individual investment. Diversification can help to mitigate this type of risk. An index fund that owns multiple underlying stocks can reduce this type of risk. Timing the market properly could help with timing risk, but not nonsystematic risk.

Question 89

John calls his broker to sell his ABC mutual fund shares on Wednesday at 3 PM. The NAV after the market close on Wednesday for ABC mutual fund was $27.85. The sold price on his confirmation showed $23.67. Upon FINRA review, this trade may be designated as a(n):
a. Clearly erroneous trade
b. Rebill
c. Outlier fill
d. Discount order fill

Answer 89

Mutual funds have one sell price per day: the NAV. With mutual funds, one buys at the POP and sells at the NAV. The NAV is calculated after 4 PM, once markets close. This trade was executed 15% lower than the NAV price and is clearly a broker-dealer or clearing firm error. This would be designated as a “clearly erroneous trade.” A discount order fill is not a widely used term, and is not applicable to the question. A rebill aka cancel/rebill occurs when some portion of the trade is processed incorrectly; for example, when a trade has been debited or credited to the wrong account. An outlier fill simply means a fill (trade execution) that was filled away from current market price but not far enough to be considered a clearly erroneous trade (15% or more away from current market price). This can happen if an order is routed to an exchange that has low liquidity and wider bid/ask prices.