Crunch Time Flashcards
Can investments that result in a loss still be suitable?
Yes, investments that result in a loss may still be suitable.
What does Regulation Best Interest (Reg BI) emphasize as the most important factor in making a recommendation?
Whether it’s in the client’s best interest.
Is a suitable investment always in the client’s best interest?
No, a suitable investment may not necessarily be in the client’s best interest.
What might be available as a lower cost alternative to a suitable investment?
A lower cost alternative of the same product.
What should registered representatives discuss before executing trades?
The risks associated with different types of investments.
True or False: Investments that fit an investor’s objectives and goals are always suitable.
False.
Fill in the blank: A suitable investment may not necessarily be in the client’s _______.
best interest.
How long must account records be kept after an account is closed?
At least six years after the date that the account was closed.
This applies even in cases where the customer died prior to the account closure.
Who may perform the review and approval of opening an account for municipal securities?
Either a General Securities Principal (Series 24) or a Municipal Securities Principal (Series 53).
Daily review of transactions must be performed by the Municipal Securities Principal.
What should a firm’s compliance be notified of regarding new customers?
If a new customer’s address doesn’t match the customer’s identification as provided under CIP rules.
What is the condition under which a required minimum distribution (RMD) is not needed from a 401(k) or 403(b) after age 73?
If a person is still working, doesn’t own more than 5% of the business, and has an employer-sponsored plan.
RMDs can be delayed until April 1 of the year after retirement.
When must RMDs be taken from an IRA?
After reaching the age of 73, even if the person is still working.
What happens to tax-deferred income when rolling over assets from a non-Roth retirement account to a Roth account?
All tax-deferred income will be taxed as ordinary income in the year of the rollover or transfer.
What options do a spouse or minor child have when inheriting an IRA?
They may withdraw over their expected lifetime, or over 10 years.
A spouse may also transfer the IRA to their own account.
What must a non-spouse or adult child do when inheriting an IRA?
Must withdraw all funds by the end of the 10th year following the year of the IRA owner’s death.
Can a registered representative exercise discretion before receiving forms from a client?
No, the RR may not exercise discretion until the forms are received and approved.
What should happen if a client wants to begin writing uncovered calls?
The registered representative needs to update the client’s investment objective to speculation.
How long must records be maintained if a tenant in a joint account dies and assets are moved to the survivor’s individual account?
For a period of not less than six years after the move.
What must a registered representative obtain to attend an educational seminar?
Firm’s approval
This is a requirement for compliance.
What is considered institutional communication?
A seminar attended only by representatives from other broker dealers
What type of communication is an email sent to 40 persons, including 20 retail and 20 institutional investors?
Correspondence
The classification depends on the number of retail investors.
What is a control relationship in the context of broker-dealer employment?
An employee of a broker-dealer making decisions for a municipality
What must be disclosed to clients when a control relationship exists?
Disclosure must be made verbally before the trade and in writing after the trade
What must a broker-dealer maintain if a registered representative receives text messages from customers?
A record of this communication
What type of communication is written material prepared for a presentation to retail investors?
Retail communications
What must registered representatives do if they possess material, non-public information (MNPI)?
Notify their compliance department
Do FINRA’s suitability rules apply to recommendations made through social media?
Yes
What is required if an RR uses social media to make a recommendation?
Preapproval by a registered principal
What happens to unsolicited third-party opinion posts on a supervised social media site?
They are not considered testimonials
What are the implications if an RR ‘likes’ or shares comments on social media?
Subject to FINRA’s communication rules and may be considered testimonials
What defines independent third-party research?
Prepared by another entity with no influence or editorial control from the requesting broker-dealer
What must be done if research is prepared by a broker-dealer or under its editorial control?
It must be approved by a principal of the broker-dealer
What types of companies does the OTCQX quote?
U.S. companies, international companies, U.S. banks, U.S. bank holding companies, U.S. thrifts, and U.S. thrift holding companies
The OTCQX does not quote penny stocks, shell companies, or blank-check companies.
During periods of stable interest rates, which type of preferred stock tends to be the most volatile?
Convertible preferred stock
This volatility is related to the conversion feature of the stock.
What type of preferred stock is most suitable for a company anticipating high earnings?
Participating preferred stock
Participating preferred stock allows holders to receive dividends above the fixed rate.
What happens to K Shares of preferred stock after approximately five years?
They change to a floating rate that will increase along with market interest rates
K Shares begin with a fixed rate.
What do K Shares of preferred stock generally represent?
Depository shares
Each depository share typically represents a certain number of preferred shares.
List three characteristics of K Shares of preferred stock.
- Non-cumulative
- Dividends considered qualified for tax purposes
- Generally offer no voting rights
What is the purpose of super voting stock?
Gives owners more than one vote per share
This allows certain investors to control a company with less than 50% ownership of common shares.
If a foreign stock is valued at $540 per share and trades in the U.S. as an ADR at 10% of its value, what is its price?
$54 per share
The stock pays a $12.50 annual dividend, which translates to a $0.625 semiannual dividend.
What can be done with capital losses that are not used in one tax year?
Carried forward to following year(s)
This allows taxpayers to offset future capital gains.
What are wash sales?
Repurchase of securities within 30 days of the date on which they were sold for a loss
Losses from wash sales are disallowed for tax purposes in the current tax year.
What does defeasance refer to?
The process by which an issuer deposits funds into an escrow account to satisfy payment obligations to bondholders.
This eliminates all rights and liens that bondholders had on the issuer’s assets.
What happens to the rights and liens of bondholders during defeasance?
They are eliminated.
The liability for the old bond issue is assumed by the trustee of the escrow account.
What does it mean for bonds to be ‘escrowed-to-maturity’?
Proceeds from a refunding bond are deposited into an escrow account and used to pay the refunded bond’s principal and interest at maturity.
This ensures that the bondholders receive their payments without risk.
When comparing two bonds with the same coupon, what affects their volatility?
The maturity; the bond with the longer maturity has more volatility.
Longer maturities typically lead to greater interest rate risk.
When comparing two bonds with the same maturity, what affects their volatility?
The coupon; the bond with the lower coupon has more volatility.
Lower coupon bonds are more sensitive to interest rate changes.
What is the percentage of the compounded accreted value an investor receives when purchasing a zero-coupon municipal bond that’s callable at 103?
103% of the compounded accreted value
In what economic condition do long-term bonds with long durations, such as zero-coupon bonds, tend to perform well?
During periods of deflation
What does the compound accreted value (CAV) of a security include?
Initial principal amount plus the accreted value to date
How are capital appreciation bonds (CAB) valued?
In the same manner as the compound accreted value (CAV)
What happens to the holder of a reverse convertible if the knock-in level is reached?
They will receive stock that’s lower in value than the principal on the bond
What is an ETN subject to?
The creditworthiness of the issuer
True or False: An ETN may appreciate regardless of the performance of the underlying index.
False
What is the insurance limit provided by the Federal Deposit Insurance Corporation (FDIC) per depositor at each bank?
$250,000
What is the coverage limit for joint bank accounts under the FDIC?
$500,000
Fill in the blank: The FDIC provides insurance for up to _______ per depositor at each bank.
$250,000
What is the clearing rate for auction rate securities?
The settled rate when an auction is successful.
What type of provision do VRDOs include?
A put option provision.
What is a double-barreled bond?
Secured from a specific source of revenue as well as the full faith and credit or taxing power of an issuer.
What are useful factors when examining the credit risk of a municipal bond?
- Property values
- Debt coverage ratios
- Competing facilities
- Demographics
Which factor is NOT useful when examining the credit risk of a municipal bond?
The direction of interest rates.
What effect do increasing revenues and decreasing expenses have on a revenue bond’s debt service coverage ratio?
It increases the debt service coverage ratio.
What are municipal zero-coupon bonds sometimes referred to as?
Capital appreciation bonds (CAB).
Are CABs suitable for investors seeking income?
No.
How is the cost basis of an original issue discount (OID) adjusted?
Accreted (upwardly adjusted) on a tax-free basis each year.
What is a suitable investment strategy for a 529 plan as the beneficiary approaches college age?
Move from growth-oriented securities to income-oriented securities.
What types of securities should a 529 plan be invested in once funds are being used?
Money-market funds or other short-term investments.
How many times per year can investments in a 529 plan be reallocated according to IRS rules?
Twice per year.
What is the maximum initial gift a person can front-load a 529 plan with per beneficiary?
$95,000.
What is the front-loading contribution treated as over a five-year period?
$19,000 each year.
What is the maximum front-loading amount for a married couple per beneficiary?
$190,000.
What is the annual limit for distributions from a 529 plan for private school tuition and books for grades K through 12?
$10,000.
What can individuals withdraw up to $10,000 from their 529 plans for, aside from college costs?
To repay a qualified student loan and expenses for certain apprenticeship programs.
What is the lifetime limit for the $10,000 withdrawal from a 529 plan?
A lifetime limit.
What are Treasury Inflation Protected Securities (TIPS) designed to do?
Keep pace with inflation
TIPS are subject to interest rate risk.
What type of risk do private label CMOs face?
Credit risk of their issuers
Government sponsored CMOs are guaranteed by the GSE or U.S. government and have less credit risk.
What risk do CMOs face if interest rates decline?
Prepayment risk
What risk do CMOs face if interest rates increase?
Extension risk
What types of taxes apply to interest received on mortgage-backed securities?
Federal, state, and local taxes
A portion of their monthly income is a return of capital and not subject to tax.
Which CMO tranche has the lowest amount of prepayment risk?
Planned Amortization Class (PAC)
Which CMO tranche provides the greatest safety of principal?
A tranche (fast-pay tranche)
True or False: Any type of retail communication may compare CMOs to bank CDs.
False
Retail communication may not compare CMOs to any other security, especially bank CDs.
What are breakpoints in mutual fund investments?
Breakpoints are permitted for investments in the same fund family even if the shares are purchased at a different broker-dealer.
What must a RR ask to determine if a breakpoint is available?
A RR must ask whether the client owns other mutual fund shares within the same fund family or in a relative’s account, even if the account is held by another broker-dealer.
What are the characteristics of interval funds?
Interval funds are a type of closed-end fund that continuously offers shares, calculates net asset value, do NOT trade on exchanges, allow selling shares back at preset intervals, and provide access to exotic investments.
What type of investments do interval funds typically provide access to?
Interval funds provide access to exotic or alternative investments such as private equity and certain commercial real estate investments.
Who are interval funds most suitable for?
Interval funds are most suitable for long-term investors, income-seeking investors, and those looking to diversify their portfolios.
What are target funds designed for?
Target funds are age-based vehicles designed to grow over a specified period to reach a targeted goal, such as retirement.
When do gold equity mutual funds tend to perform well?
Gold equity mutual funds tend to do well when the economy is performing poorly.
Who are gold equity mutual funds suitable for?
Gold equity mutual funds are suitable for investors who are willing to assume significant risk.
What is an alternative to selling short?
An alternative to selling short is to purchase an inverse ETF.
How is the net asset value of an ETF calculated?
The net asset value of an ETF is recalculated each day using the value of the securities in the underlying index.
What happens to the value of an inverse ETF when the index rises?
The value of an inverse ETF that perfectly tracks the index will fall at the same percentage that the index rises.
What happens to the value of an inverse ETF when the index falls?
The value of an inverse ETF will rise at the same percentage that the index falls.
What is a benefit of purchasing leveraged ETFs?
Leveraged ETFs allow investors to add leverage to their accounts without opening a margin account.
What tax advantage do ETFs have over mutual funds?
ETFs provide a tax advantage because their structure minimizes the recognition of capital gains, reducing taxable distributions to investors.
What tax implications does a beneficiary face when receiving a death benefit from an annuity?
The beneficiary is not subject to a tax penalty, but the amount exceeding the cost basis is subject to taxation at ordinary rates
This means that the original investment is not taxed, only the earnings above that amount.
When are guaranteed death benefits paid in a variable annuity?
Only during the accumulation phase
This indicates the period before the annuity is converted into an income stream.
Which settlement option provides the greatest payout for an annuitant?
The life annuity settlement option
This option pays out as long as the annuitant is alive.
How does a life annuity with a short period certain settlement option compare to a unit refund life annuity?
It offers a greater monthly payout
The short period certain option guarantees payments for a limited time, while the unit refund option guarantees payout of the accumulated value less expenses.
What are variable annuity L shares and their characteristics?
They are referred to as short surrender securities with deferred sales charges declining to zero in three to four years
This means that investors will not incur sales charges after the specified period.
In a variable life insurance policy, how can the death benefit vary?
The death benefit may exceed the guaranteed minimum based on the value of the subaccount products
This means the performance of the investments affects the total death benefit.
Can investors make changes to their investment portfolio after annuitizing?
Yes, investors are still permitted to make changes to the allocations of the investment portfolio
This flexibility allows for adjustments based on market conditions or personal financial goals.
