CH 8 Packaged products Flashcards
The trading of REITs is most similar to what type of investment company?
Closed-end management companies, since both trade in the secondary market (exchange or OTC)
True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income.
True. Regulated Investment Companies will only be taxed on the income retained.
What inquiry is made of a client who is exchanging one variable annuity for another?
Whether other exchanges occurred in the previous 36 months (record of the firm inquiry and client response is retained)
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
Are expenses related to an RR’s attendance at an issuer-sponsored seminar on variable contracts able to be reimbursed?
Yes, provided the reimbursement is not tied to achieving a sales target.
Typically, investment companies are allowed no more than ____ days from request to complete a redemption.
Typically, investment companies are allowed no more than 7 days from request to complete a redemption.
When and to whom are completed variable contract applications forwarded?
Promptly to an OSJ
Mutual funds are required to provide a ___________ report to their shareholders.
Mutual funds are required to provide a semiannual report to their shareholders.
An ADR issued in cooperation with the issuing foreign company is a __________ ADR.
An ADR issued in cooperation with the issuing foreign company is a sponsored ADR.
When recommending a variable contract, a firm must consider the client’s suitability for what different factors?
The initial purchase, the subaccounts to which funds are allocated, the exchange of one contract for another
A REIT must have a minimum of ____ shareholders, with no more than ____% of the trust owned by _____ or fewer persons.
A REIT must have a minimum of 100 shareholders, with no more than 50% of the trust owned by five or fewer persons.
With what should a firm be concerned if an RR recommends certain funds because they are hot?
The RR may be implying that past performance is indicative of future results.
For tax purposes, S Corporations and limited liability companies (LLCs) are ______________ investments.
For tax purposes, S Corporations and limited liability companies (LLCs) are pass through investments.
Letters of Intent may be back-dated for _____ days.
Letters of Intent may be back-dated for 90 days.
May fund sponsors hold educational seminars and pay hotel and meal expenses for BD salespeople and their guests?
No. Fund sponsors may pay hotel and meal expenses for BD salespeople, but NOT for their guests.
What investment benefit do REITs provide to investors?
Stable dividend payments
A REIT will not be taxed on its income if it distributes ____% of it to shareholders.
a REIT will not be taxed on its income if it distributes 90% of it to shareholders.
Who usually manages a wrap account?
An investment adviser
Wrap accounts benefit clients who trade ___________.
Wrap accounts benefit clients who trade frequently.
If a firm induces purchases by selling dividends, how does it result in a disadvantage for investors?
The dividend is already included in the price that investors must pay for the shares.
What is an ownership characteristic of a REIT?
Limited liability
True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.
True. However, the purchases must all be from the same fund family.
The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.
The annuity with growth dependent on the performance of securities in a separate account is called a variable annuity.
According to the Anti-Reciprocal Rule, what practice is prohibited when selling mutual fund shares?
Paying more compensation for selling a fund or creating a preferred list of funds to sell based on commissions received
True or False: ADRs are priced in, and pay dividends in, the currency of the issuing foreign company.
False. ADRs are priced in, and pay dividends in, U.S. dollars.
Letters of Intent are valid for ____ months.
Letters of Intent are valid for 13 months.
Is it prohibited to receive an occasional meal or tickets to an event as compensation for selling variable contracts?
No, provided the compensation is not tied to achieving a sales target.
True or False: A REIT is considered an investment company.
False
A BD is running a sales contest that offers prizes to staff based on mutual fund sales. When is this practice allowed?
When the compensation (prize) is not based on the sale of a particular fund
True or False: Member firms may hold sales contests for proprietary (in house) funds.
False
An S Corporation is allowed a maximum of ____ shareholders.
An S Corporation is allowed a maximum of 100 shareholders.
Where do unsponsored ADRs generally trade?
In the OTC market (e.g., Pink Market)
True or False: Mutual fund shares may be purchased and sold in the secondary market.
False. Mutual funds are always considered new issues and are bought and sold through the fund.
True or False: Generally, shareholders bear the burden of paying tax on income generated by a REIT.
True. Most REITs distribute a significant amount of their income to shareholders.
What must be disclosed when an RR recommends switching from one fund family to another?
The switch is a taxable event and a new sales charge may apply.
To qualify as a regulated investment company, a fund must distribute at least ____% of its net investment income.
To qualify as a regulated investment company, a fund must distribute at least 90% of its net investment income.
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
Todd is a Series 7 registered representative. May he offer wrap accounts to his high net worth clients?
No. To offer wrap accounts, Todd would also need a Series 65 or 66 registration.
What must exist before a FINRA member may sell variable contracts through another firm?
A sales agreement
Where do ADRs trade?
On an exchange or through the OTC markets
95% of a REIT’s gross income may be based on various activities, and ____% must be solely from real estate.
95% of a REIT’s gross income may be based on various activities, and 75% must be solely from real estate.
According to industry rules, _____% is the maximum sales charge on mutual funds.
According to industry rules, 8.5% is the maximum sales charge on mutual funds.
True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.
True
In what does a real estate investment trust (REIT) invest?
A diversified portfolio of properties and/or mortgages
After the initial offering of a REIT, where will subsequent trading occur?
Either on an exchange or OTC
Funds offer ______________________ to allow buyers to add all purchases made from a fund family to reduce sales charge.
Funds offer Rights of Accumulation to allow buyers to add all purchases made from a fund family to reduce sales charge.
List some characteristics of American Depositary Receipts (ADRs).
Priced in U.S. dollars, pay dividends in U.S. dollars, carry voting rights, are sponsored or unsponsored
Where may sponsored ADRs trade?
On U.S. exchanges (Nasdaq or the NYSE)
Provided a FINRA member has a selling agreement with a fund, when may the member buy shares at a discount?
If the purchase is for its own account or to fill an existing client order
When may a variable contract be sold to another firm at a discount?
When the purchasing firm is also a member of FINRA
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fee
How is the taxation of income for S Corporations and LLCs identical to that of a partnership?
Federal tax is avoided by passing through income and loss to shareholders (no double taxation).
Define breakpoint.
Dollar levels of investment purchases that qualify for a reduced sales charge
What is the tax treatment of a partial withdrawal from a nonqualified annuity?
Only the earnings portion is taxable at the individual’s ordinary rate.
True or False: SEC approval is required for a mutual fund to institute a 12b-1 plan.
False. Approval of shareholders, the board of directors, and a majority of disinterested directors is required.
True or False: Class A shares offer a breakpoint for large purchases.
True
True or False: Member firms/RRs may accept securities in lieu of cash on the sale of a variable contract.
False
True or False: The initial offering of a REIT is exempt from the Securities Act of 1933.
False. Registration is required under the Act.
What investment facilitates the trading of foreign securities in U.S. markets?
American Depositary Receipts (ADRs)
On what must 95% of a REIT’s gross income be derived?
Real estate-related activities, interest received on mortgages, or dividends and interest
What written documentation is required when recommending a 1035 exchange of a variable annuity?
Whether the client has completed a 1035 exchange in the past 36 months
True or False: A BD may NOT make a market in mutual fund shares.
True. Member firms may only buy fund shares to fill a existing customer order or for its own investment account.
Within _____ business days of being sent to an OSJ, a principal must approve or reject a variable contract application.
Within seven business days of being sent to an OSJ, a principal must approve or reject a variable contract application.
Define wrap account.
A managed account that charges clients an annual fee to cover trading, research, and advisory services
True or False: Engaging in breakpoint sales is allowed when dealing with larger investors.
False. Selling shares at amounts just below where a breakpoint is available is prohibited with all types of clients.
True or False: FINRA must approve or reject a completed application for the purchase of a variable contract.
False. A principal of the member firm offering the contract must sign the application indicating approval or rejection.
When recommending a variable annuity to a client, when must a principal review and approve/disapprove the trade?
Within 7 business days
What is required for a mutual fund distributor to be allowed to reimburse another firm’s RR for attending a seminar?
The RR must have his firm’s permission. Attendance may not be tied to fund sales. The location must be appropriate.
An ADR issued without the involvement of the issuing foreign company is an ____________ ADR.
An ADR issued without the involvement of the issuing foreign company is an unsponsored ADR.
Define selling dividends.
The prohibited practice of inducing purchases due to an impending dividend payment
True or False: The principal underwriter of a variable contract may sell through another BD.
True, provided the other firm is a FINRA member.
Partnerships distribute ____% of income to owners, while REITs generally distribute ___% of income to shareholders.
Partnerships distribute 100% of income to owners, while REITs generally distribute 90% of income to shareholders.
To institute a 12b-1 plan, whose approval must be obtained?
Shareholders, the board of directors, and a majority of disinterested directors.
True or False: A client employing a buy-and-hold strategy is most suitable for a wrap account.
False. Wrap accounts are suitable for clients who execute several trades a week.
Mutual fund breakpoints provide clients with the ability to invest _____ money at a ______ sales charge.
Mutual fund breakpoints provide clients with the ability to invest more money at a lower sales charge.
Does the owner of an ADR receive voting rights?
Yes.
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
True or False: A hedge fund is always required to register as an investment company.
False. A hedge fund is not required to register if it has no more than 100 shareholders and makes no public offering.
Define breakpoint sales.
Illegally inducing the purchase of mutual fund shares at dollar levels below where a breakpoint is available.
What happens if a variable contract is sold to a client who then cancels the contract within seven business days?
The selling BD must return its portion of the sales charge.
Is a letter of intent binding on the investor?
