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FINRA - Series 10 > Chapter 4 - Investment Co./ Ret. Plans / Financial Responsibility Rules > Flashcards

Chapter 4 - Investment Co./ Ret. Plans / Financial Responsibility Rules Flashcards

1
Q

True or False

The Securities Act of 1934 regulates the functions of investment companies.

A

False.

The Investment Company Act of 1940 regulates the functions of investment companies.

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2
Q

True or False

The Investment Company Act of 1940 regulates the functions of investment companies.

A

True

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3
Q

What are the three types of “investment companies” as defined by the Act of 1940?

A
  • Face Amount Certificate Company • Management Company

* Unit Investment Trust

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4
Q

In the past, what were Face Amount Certificate Companies used for?

A

They were used in place of mortgages.

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5
Q

What is the most popular type of investment company?

A

Open-end mutual fund

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6
Q

True or False

Shares of open-end mutual funds are non-negotiable. They cannot be traded.

Instead, the shares are redeemable with the fund at any time.

A

True

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7
Q

What are the two types of unit investment trusts?

A
  1. Fixed Trusts

2. Participating trusts

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8
Q

True or False

A variable annuity is an example of a participating UIT.

A

True

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9
Q

True or False

Much of the registration statement is the proposed “Prospectus,” which details the objective of the fund, the Board of Directors, the fees involved and the track record of the sponsor.

A

True

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10
Q

What is the 75/5/10 rule?

A

The fund can be set up either as a diversified fund or a non-diversified fund.

A diversified fund is one which has:

  1. 75% or more of its assets invested in securities;
  2. A maximum of 5% of its assets invested in any one issuer;
  3. A maximum holding of 10% of the voting securities in any one issuer.
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11
Q

True or False

The majority of mutual funds are “non-diversified” funds.

A

False.

The great majority of funds are diversified to reduce investment risk.

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12
Q

What is the maximum sales charge on mutual fund purchases under FINRA rules?

A

8.5% of POP

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13
Q

Under the Investment Company Act of 1940, when a customer redeems mutual fund shares, he must be paid within how many calendar days?

A

7

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14
Q

In order to charge the maximum 8.5% sales charge, the fund must offer what three things?

A
  1. Breakpoints
  2. Letter of Intent
  3. Rights of accumulation
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15
Q

True or False

Breakpoints can not be met by asset appreciation?

A

False.

Breakpoints can be met by asset appreciation.

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16
Q

Under the Investment Company Act of 1940, how frequently must management companies send financial statements to shareholders?

A

Semi-annually

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17
Q

True or False

Under Rule 12b-1, an investment company can finance activities intended to result in the sale of shares, such as advertising, mailing of prospectuses to persons other than current shareholders, printing and mailing of sales literature, and compensation of sales personnel.

A

True

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18
Q

To adopt a 12b-1 plan, the plan must be approved by a majority vote by which three groups of people?

A
  1. Shareholders
  2. Board of directors
  3. Uninterested directors
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19
Q

A person must be appointed to direct expenditures of funds allocated to the plan, who must give reports to the Board how often?

A

Quarterly

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20
Q

A spending plan (which is reapproved annually) may be terminated at any time by a majority vote from either of which two entities?

A
  1. Shareholders

2. Uninterested shareholders

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21
Q

True or False

A majority vote from the Board is required to terminate a spending plan.

A

Majority vote of the entire Board is not needed to terminate the plan.

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22
Q

Who has to give approval for the spending plan to materially increase funds spent?

A

The plan cannot be amended to materially increase funds spent unless approved by both shareholders and the Board.

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23
Q

True or False

While Net Capital Gains can be paid out multiple times per year, dividends are only paid once a year.

A

False.

Dividends can be paid multiple times per year.

Net Capital Gains may only be distributed once per year.

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24
Q

If rights of accumulation are not made at least as favorable as the terms on the FINRA schedule, what is the max sales charge?

A

8.00%

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25
Q

If breakpoints are not made at least as favorable as the terms on the FINRA schedule, what is the max sales charge?

A

7.75%

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26
Q

If rights of accumulation AND breakpoints are not made at least as favorable as the terms on the FINRA schedule, what is the max sales charge?

A

7.25%

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27
Q

If a fund offers a 12b-1 plan, FINRA limits the maximum sales charge to a% for funds that pay service fees (these are payments made by investment companies to third parties for maintenance of shareholder accounts); and b% for funds that do not impose service fees.

A

a. 6.25%

b. 7.25%

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28
Q

FINRA rules prohibit funds from imposing 12b-1 fees in excess of ___% annually

A

.75%

If a mutual fund wishes to advertise itself as a “no-load” fund, FINRA rules require that the fund cannot charge an annual 12b- l fee in excess of .25%.

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29
Q

True or False

If a mutual fund wishes to advertise itself as a “no-load” fund, FINRA rules require that the fund cannot charge an annual 12b-1 fee in excess of .75%.

A

False.

If a mutual fund wishes to advertise itself as a “no-load” fund, FINRA rules require that the fund cannot charge an annual 12b-1 fee in excess of .25%.

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30
Q

True or False

FINRA rules prohibit member firms from offering investment company shares if:

service fees paid by the investment company exceed .25% of net assets; or

a sales charge is imposed on reinvested dividends (meaning that reinvestment of dividends is not made at NAV).

A

True

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31
Q

True or False

FINRA prohibits fund underwriters from compensating persons for retail distribution of fund shares with:

  • Stock, warrants or options;
  • Merchandise or trips;
  • Any compensation not stated in the prospectus;
  • Any item of material value.
A

True

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32
Q

The FINRA interpretation on chaiitable solicitation only applies to employees of institutional customers (mutual funds or investment advisers) seeking charitable contributions from who?

A

Broker-dealers

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33
Q

True or False

Regarding soft-dollar remuneration, broker-dealers cannot pay rent subsidies to the mutual fund because that does not directly benefit the fund’s shareholders.

A

True

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34
Q

Which of the following are considered “generic” advertising, not requiring the firm to send a prospectus first?

i. Explanatory information about investment company securities; the nature of investment companies; or the services offered;
ii. Explanation of differing investment objectives;
iii. Explanation of various products and services;
iv. An invitation to inquire for further information.

A

i, ii, iii, iv

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35
Q

SEC interpretations permit past performance to be shown in such announcements, if what 3 conditions are met?

A
  1. Total Return is shown for 1, 5, and 10 year periods (or the life of the fund, if shorter);
  2. Total Return is broken down into income and capital gains components;
  3. All sales charges and expenses are reflected.
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36
Q

Are units of a UIT redeemable with the trust sponsor at any time, at their Net Asset Value or the Public Offering Price?

A

NAV

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37
Q

In a fixed annuity, which party assumes investment risk?

A

The insurance company.

In a fixed annuity contract, the insurer guarantees a specific rate of return to the investor. No matter how good or bad the investments funding the annuity performs, the investor gets the guaranteed annuity amount.

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38
Q

True or False

The actual number of annuity units received depends on the sex, age, habits (such as smoking), and annuity option made by the contract holder.

A

True

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39
Q

For what type of security would the selling representative have to disclose and get a signed document from the client stating that the:

customer has been informed, in general terms, of the material features of the product;

customer would benefit from one or more of the features of the products; and

particular ___________ as a whole, the underlying separate accounts to which funds are allocated at the time of purchase, and the riders to the policy are suitable.

A

Variable annuity

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40
Q

True or False

FINRA states that valid reasons to exchange an existing whole life insurance policy are:

to get better coverage at the same, or lower cost;

to get more desirable features or benefits; or

if the customer is concerned about the solvency of the company that issued the original policy or with the service of the agent that sold the policy.

A

The first point is wrong…

FINRA states that a valid reason to exchange an existing whole life insurance policy would be to get better coverage at a lower cost. NOT the same or lower cost.

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41
Q

To get a handle on the customer’s existing coverage, the existing insurance company’s ____________ on that policy would be examined.

A

“In-force ledger”

The in-force ledger is the statement of the existing whole life policy’s cash value, surrender charges (if applicable); and projections of future death benefit and cash value.

This would be used to see what the current coverage amount is; if there are surrender charges on the existing policy; if there is cash value that can be used to pay for a new policy; and if the insurance amount provided by the new policy is comparable or better than that provided by the old policy.

42
Q

True or False

Under IRS rules, retirement plans can be either “tax qualified” or “non-tax qualified”.

A

True

43
Q

True or False

Variable annuities are made with tax qualified contributions.

A

False.

Variable annuities are non-tax qualified plans because the contribution is not deductible from the tax return. Investment is made with “after tax” dollars.

44
Q

If a lump sum is made from a variable annuity, what type of accounting does the IRS require to be used (FIFO, LIFO, or another)?

A

LIFO - Last in, First out

This means that the taxable earnings (the tax-deferred build up, not the principal invested) comes out first followed by the tax-free return of original capital (cost-basis).

45
Q

True or False

In a variable annuity, if distributions are taken prior to the age of 59.5, they are subject not only to regular tax on the portion attributable to the build-up but also to a 10% penalty on the build-up portion taken out.

A

True

46
Q

What type of retirement plans are these?

  • Tax-Deferred Annuity Plans (403(b))
  • Payroll Deduction Savings Plans (40l(k))
  • Deferred Compensation Plans
  • Profit-Sharing Plans
A

Defined Contribution plans.

47
Q

Under tax qualified plans, what is the contributor’s cost basis on the investments?

A

Zero.

48
Q

True or False

The income counted for an IRA contribution is a person’s payments received for providing services plus investment income.

A

False.

Investment income is NOT included.

49
Q

If contributions to a tax deferred IRA are made in excess of the IRA contribution limit, an annual penalty tax is imposed on the excess amount for as long as it stays in the account. What percentage is the penalty?

A

6%

50
Q

True or False

Along with US minted gold coins, art and collectibles can be used as IRA investments

A

False.

US minted gold coins, gold and silver bullion may be used.

Art and collectibles may not.

51
Q

How many trustee to trustee transfers of IRA assets may be made each year?

A

an unlimited number.

Only 1 “rollover distribution” per rolling 12 months though*

52
Q

True or False

Someone whose life expectancy is greater than 5 years should choose to receive assets from an inherited IRA over the course of their life and NOT the 5-year rule.

A

True

53
Q

What is the major difference between investments allowed in an IRA vs a Keogh?

A

Keoghs allow cash value of whole life insurance policies to be considered an investment.

IRAs do not.

54
Q

Retirement benefits vest over how many years?

At what percentage per year?

A

5 years

at 20% per year.

55
Q

The plan trustee must manage the assets of the plan in the best interest of who?

A

ALL participants - he has a fiduciary responsibility.

Plan assets must be segregated from other company assets.

56
Q

True or False

The broker of record on a corporate retirement plan is a fiduciary to the plan.

A

False.

The “broker of record’ is not a fiduciary to the plan and does not provide advice to the plan fiduciary or plan participants regarding specific investments or investment alternatives offered by the plan.

57
Q

True or False

An actuary is used to determine the total plan contribution made each year to a defined contribution plan.

A

False.

They are used for defined benefit plans.

58
Q

True or False

Companies are obligated to fund their entire pension obligation each year in a defined benefit plan.

A

False.

Companies are not obligated to fund their entire pension obligation each year in a defined benefit plan.

There are minimum funding requirements specified by ERISA, which can leave the company with an “unfunded” pension liability. The minimum funding requirements are computed by an actuary.

59
Q

Under which circumstance may a person contribute to a “tax deferred” annuity?

A

Normally, annuities are non-tax qualified.

However, employees of non-profit organizations such as schools, hospitals, and foundations, are allowed to contribute to ‘tax-qualified’ annuities.

The maximum contribution amount for tax year 2016 is $18,000. Contributions are tax deductible, and the earnings are tax deferred; so that all payments received are 100% taxable.

60
Q

True or False

529 funds can be used to pay for all types of education expenses, including primary and secondary school costs.

A

False.

Coverdell ESA funds can be used to pay for all types of education expenses, including primary and secondary school costs (unlike 529 plans, where the funds can only pay for higher education).

If Coverdell ESA funds are withdrawn and are not used for education expenses, the monies will be subject to regular income tax plus a 10% penalty tax.

61
Q

__________ are called “municipal fund securities” because, in essence, a mutual fund is being purchased in a State-sponsored wrapper.

A

529 plans

62
Q

True or False

529 plans are not subject to MSRB rules - only SEC rules apply.

A

False.

Because the State is the legal issuer, 529 plan sales are subject to MSRB rules.

63
Q

True or False

529 plans are exempt from the requirement to:

prepare a prospectus and statement of additional information (SAI);

calculate net asset value daily; and

establish a Board of Directors that includes a minimum percentage of independent directors (the 1940 Act requires that at least 40% of the Board be “disinterested persons”).

A

True

64
Q

Under MSRB rules, when must the purchaser of a 529 plan be provided with a copy of the plan’s Official Statement?

A

the purchaser of the plan must be provided with a copy of the plan’s Official Statement (disclosure document), at, or prior to, settlement of the first transaction.

65
Q

True or False

Cash and/or securities may be contributed to a 529 plan.

A

False.

Only cash can be used to contribute to a 529 plan.

66
Q

Under what 3 situations would the 10% penalty tax on non-qualified withdrawals from college savings plans be waived?

A

If the beneficiary:

  1. Dies
  2. Becomes disabled and elects not to attend college.

Or

  1. Receives a scholarship, precluding the need for funding.
67
Q

True or False

The named beneficiary on a 529 plan may only be changed one time per year.

A

False.

The named beneficiary may be changed at any time.

The donor (not owner) to a 529 plan may also be the beneficiary.

68
Q

True or False

For customers participating in a non-periodic program where periodic statements will be sent in lieu of individual confirmations, statements must be sent monthly, within 10 business days of the end of the month.

A

False.

They must be sent within 5 business days of quarter end.

69
Q

Under what 3 situations would the 10% penalty tax on non-qualified withdrawals from college savings plans be waived?

A

If the beneficiary:

  1. Dies
  2. Becomes disabled and elects not to attend college.

Or

  1. Receives a scholarship, precluding the need for funding.
70
Q

True or False

The named beneficiary on a 529 plan may only be changed one time per year.

A

False.

The named beneficiary may be changed at any time.

The donor (not owner) to a 529 plan may also be the beneficiary.

71
Q

True or False

For customers participating in a non-periodic program where periodic statements will be sent in lieu of individual confirmations, statements must be sent monthly, within 10 business days of the end of the month.

A

False.

They must be sent within 5 business days of quarter end.

72
Q

What was the intent of the Customer Protection Rule written in 1975?

A

The intent of the rule is
to ensure that brokerage firms always have sufficient funds on hand to meet customer claims in a liquidation.

In addition, the rule places requirements on broker-dealers to promptly obtain possession or control of securities on settlement.

These requirements ensure that “back office” operations do not get out of control.

73
Q

What does it mean for a brokerage firm to have securities reduced to possession or control?

A

“Possession or control” means that the firm physically has the security or knows the whereabouts of the security.

74
Q

True or False

Securities are considered to be “in possession or control” if the certificates are in:

the custody of the firm or a clearing corporation;

the custody of a bank;
transfer for not more than 40 days; or

transit for not more than 5 days.

A

True

75
Q

Any fail to deliver for a customer account must be brought in on the ___th business day after settlement.

A

10th

76
Q

Any fail to receive for a customer account must be bought in on the ___th calendar day after settlement.

A

30th

77
Q

True or False

For purposes of the exam, the SIC is the “designee of the SEC” for reporting lost or stolen securities.

A

True

78
Q

If a firm suspects that they have counterfeit or stolen securities, which 3 parties must they notify?

A

Within 1 day:

a. Securities Information Center (SIC)
b. Transfer agent

“Promptly”:
c.FBI

79
Q

True or False

Audited FOCUS (Financial Operations Combined Uniform Single) reports must be sent periodically to the designated examining authority such as FINRA.

A

FALSE.

The FOCUS reports must be unaudited when sent to the DEA.

80
Q

True or False

Audited FOCUS (Financial Operations Combined Uniform Single) reports must be sent periodically to the designated examining authority such as FINRA.

A

FALSE.

The FOCUS reports must be unaudited when sent to the DEA.

81
Q

Customers of each clearing firm must be sent an audited balance sheet and the audited computed amount of Net Capital within how many days from the firm’s fiscal year end?

A

105 days

In addition, the firm must send a semi-annual unaudited balance sheet to its customers no later than 65 days after its mid-year point.

82
Q

Each clearing firm must send a semi-annual unaudited balance sheet to its customers no later than ___ days after its mid-year point.

A

65

83
Q

True or False

The definition of “customer” includes partners and subordinated lenders to the firm

A

False.

“customer” is defined as any person that has cash or securities in custody of the firm; and anyone who has effected a securities transaction through the firm in the month before or after the balance sheet is issued.

84
Q

Which records are required to be kept for the life of a firm?

A

Articles of Incorporation or Partnership Agreement;
Minutes of Board Meetings or Partnership Meetings.

These records must be kept for the life of the firm.

The last 2 years’ records must be kept readily accessible for audit.

85
Q

Which records are required to be kept for 6 years?

A

General ledger

Purchase and Sales Blotters

Cash Receipts and Disbursement Blotters

Stock Received and Deliver Blotters

Customer Account Records (Customer Statements)

Stock Record

86
Q

What is the minimum net capital required for firms that carry customer accounts and hold customer funds/securities?

A

$250,000

87
Q

What is the minimum net capital required for firms that do not carry customer accounts but which accept monies and securities from customers and immediately forward them to a clearing firm?

A

$50,000

88
Q

What is the minimum net capital required for firms that do not carry customer accounts or hold customer funds/securities?

A

$5,000

89
Q

True or False

The CE training must be delivered to all registered persons that deal with the public including institutional investors.

A

True

90
Q

True or False

On the purchase and sales blotter, all trades must be reported no later than the end of business on the trade date.

A

False.

Trades must be reported no later than the day after the trade date.

91
Q

How long do firms need to keep fingerprint records of associated persons after that person leaves the employ of a broker-dealer?

A

3 years

92
Q

What is the maximum contribution to a spousal IRA for a couple under age 50?

A

11,000 (split evenly between 2 accounts)

93
Q

The Customer Protection Rule requires that all fully paid customer securities and all excess margin customer securities be reduced to possession or control how frequently?

A

Daily

94
Q

Excess margin securities are defined as customer securities in excess of ___% of the customer’s debit balances.

A

140%

95
Q

If securities are suspected to be stolen, which three entities must be informed?

A
  1. Transfer Agent
  2. Local authorities (FBI)
  3. SIC - Securities Information Center
96
Q

True or False

A distribution from a 529 plan is taxable if the beneficiary receives a scholarship to college.

A

False.

If the beneficiary receives a scholarship or passes away, refunds from a 529 are non-taxable.

97
Q

What is the net capital requirement amount for a broker-dealer who neither receives or holds customer securities

A

$5,000

98
Q

True or False

The beneficiary on a Coverdell Education Savings plan may not be changed.

A

False.

The beneficiary may be changed.!

99
Q

All of the following agencies are empowered to enforce MSRB rules except:

a. Federal Deposit Insurance Corporation
b. Federal Reserve
c. Office of the Comptroller of Currency
d. Office of Thrift Supervision

A

D.

Office of Thrift Supervision regulated savings and loans.

100
Q

A municipal sales principal (series 9/10) may perform all of the following functions except:

A. Approval of customer accounts

B. Endorsement of order memoranda

C. Approval of branch office advertising

D. Resolution of customer complaints

A

C.

A 9/10 cannot approve advertising nor can he supervise investment banking, trading, or research.

101
Q

All customer confirmations must show the yield with two major exceptions - what are the exceptions?

A
  1. Trades for variable rate bonds

2. Bonds sold at par

102
Q

The most detailed information about a new municipal issue can be found in the ____________.

  1. Trust Indenture
  2. Official Notice of Sale
  3. Official Statement
  4. Prospectus
A
  1. Official statement

FINRA - Series 10 (6 decks)

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