FC Chapter 8 Flashcards
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 breakpoint.
Dollar levels of investment purchases that qualify for a reduced sales charge
True or False: Member firms may hold sales contests for proprietary (in house) funds.
False
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.
When and to whom are completed variable contract applications forwarded?
Promptly to an OSJ
Firms must pay FINRA an annual assessment based on gross revenue generated from transactions within ____ days of notice.
Firms must pay FINRA an annual assessment based on gross revenue generated from transactions within 15 days of notice.
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.
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.
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.
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.
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.
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.
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
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.
If mutual fund shares are redeemed within seven business days of purchase, _____% of sales charges are forfeited.
If mutual fund shares are redeemed within seven business days of purchase, 100% of sales charges are forfeited.
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.
If a member firm fails to pay its annual assessment to FINRA, what is the potential penalty?
Its membership may be cancelled or suspended.
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.
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.
FINRA requires member firms to pay an annual assessment based on gross revenue from what types of transactions?
Exchange, over-the-counter, and municipal transactions
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
What opportunity do shareholders have when a dividend or capital gains distribution is made from a mutual fund?
Shareholders may reinvest the money (after-tax) and buy additional shares.
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.
Letters of Intent are valid for ____ months.
Letters of Intent are valid for 13 months.
True or False: Class A shares offer a breakpoint for large purchases.
True
What must exist before a FINRA member may sell variable contracts through another firm?
A sales agreement
Letters of Intent may be back-dated for _____ days.
Letters of Intent may be back-dated for 90 days.
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
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fee
True or False: Member firms/RRs may accept securities in lieu of cash on the sale of a variable contract.
False
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
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.
When does a mutual fund calculate its net asset value (NAV)?
As stated in the prospectus, but at least daily
What Act regulates the activities of fiduciaries?
The Prudent Investor Act
True or False: When a mutual fund makes a distribution to shareholders, a written statement must be provided.
True. The statement will be provided to indicate the source of the distribution.
True or False: The principal underwriter of a variable contract may sell through another BD.
True, provided the other firm is a FINRA member.
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
Hedge funds register as investment companies when they have more than ____ shareholders and offer shares to ___________.
Hedge funds register as investment companies when they have more than 100 shareholders and offer shares to the public.
Define selling dividends.
The prohibited practice of inducing purchases due to an impending dividend payment
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.
True or False: Recommending short-term trading of mutual fund shares is advantageous to selling BDs.
False. BDs who recommend short-term trading would risk forfeiting sales charges due to the early redemption.
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.
To institute a 12b-1 plan, whose approval must be obtained?
Shareholders, the board of directors, and a majority of disinterested directors
Investment companies must send financial statements to customers every ____ months.
Investment companies must send financial statements to customers every 6 months.
If a fund qualifies as a regulated investment company, who bears the tax burden on net investment income?
Shareholders
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: 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.
What happens if an investor redeems her mutual fund shares within seven business days of purchase?
Both the BD and the underwriter forfeit their portion of the sales charge to the issuer.
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: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.
True
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.
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: Sales charges are forfeited if mutual fund shares are redeemed within 10 business days of purchase.
False. Sales charges are forfeited if redemption occurs within seven business days of purchase.
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.
After the initial offering, where are shares of a closed-end management company purchased?
In the secondary market (like shares of stock)
When may a variable contract be sold to another firm at a discount?
When the purchasing firm is also a member of FINRA
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)
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
Mutual funds are required to provide a ___________ report to their shareholders.
Mutual funds are required to provide a semiannual report to their shareholders.
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.
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.
Define breakpoint sales.
Illegally inducing the purchase of mutual fund shares at dollar levels below where a breakpoint is available
A mutual fund must calculate its net asset value (NAV) at least ______.
A mutual fund must calculate its net asset value (NAV) at least daily.
When recommending a variable annuity to a client, when must a principal review and approve/disapprove the trade?
Within 7 business days
In a custodial account, when may the custodian grant discretion to another party?
Never
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.
In a non-qualified annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
When must a member firm pay its annual assessment to FINRA?
Within 15 days of notice
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.
What amount of an investment company’s Board of Directors must be independent/unaffiliated?
A majority
