Sales Practices

Question 0

Statement of Additional Information

Answer 0

This document contains additional information about the fund. It is not required in the sales process, but must be provided upon request of the customer within 3 business days. Ticker symbol must be disclosed on the front page.

Question 1

Describe Preliminary Prospectus (Red Herring)

Answer 1

Used during the registration phase of a new issue to generate interest in a proposed new offering. Must include a statement on the front cover in red that “the document is not the final prospectus.”

Question 2

Omitting Prospectus (SEC Rule 482)

Answer 2

A printed ad that solicits indications of interest in a securities offering. Also known as a tombstone ad.

1) It must state whom the full prospectus can be obtained from.
2) Urge investors to read the full prospectus carefully before investing
3) Past performance data must be accompanied by appropriate disclaimers and disclosures of sale loads.
4) It may not be used to purchase shares
5) If performance is shown, it must show annual returns for 1, 5, and 10 years or since inception.

Question 3

Summary Prospectus (SEC Rule 498)

Answer 3

Document written in easy to understand format. A summary of key information about a mutual fund which must contain the following.

• The fund’s name and class
• The ticker symbol
• If the fund is an Exchange Traded Fund, the principal US market where the funds are traded must be identified.
• Legend required on cover page with
  1) Phone number or website to request a prospectus (must be sent in 3 business days if requested)
  2) Risk/Return summary… Investments, risks, performance and Fee table.
  3) Investment objectives, disclosure of portfolio holdings and principal investment strategies.
  4) Management, Organization and Capital Structure
  5) Shareholder information
  6) Distribution Arrangements
  7) Financial highlights.

Question 4

Civil Liabilities under the Securities Act of 1933

Answer 4

Allows a purchaser of a security to sue every person who signed the registration form, all directors of the issuer, attorneys, accountants, appraisers, underwriters and parent companies if a registration statement has a false statement of a material fact or an omission of a material fact.

Question 5

SEC Rule 135A - Generic Advertising

Answer 5

Promotes investment in a medium but does not refer to any specific security or specific investment company. It may provide information on the nature of investments, types securities generally offered and different types of funds. Ex balanced funds, growth funds etc.

Must contain the name and address of the B/D or other person sponsoring the ad.

Any security, product or service mentioned must be available at the sponsoring B/D

Question 6

SEC Rule 156 - Sales Literature

Answer 6

Any communication in writing, over the radio or on TV, that any person uses to sell securities. This Includes communications with issuers, B/D and underwriters, if the communication can be reasonably expected to be provided to a customer.
The communication must not be misleading.

Question 7

What is considered Misleading?

Answer 7

• An untrue statement of material fact.
• Omission of material facts.
• For illustrations and presentations*
• Absence of explanations, qualifications or limitations.
• Failure to state general economic and financial conditions over the period illustrated
• Expressed or implied representations that future performance can be predicted by past performance.
• Statements about possible benefits which do not give equal prominence risks or limitations.
• Exaggerated or unsubstantiated claims
• Incompletely explained comparisons to other products.

Question 8

Section 34b-1 Sales Literature Deemed Misleading

Answer 8

Any investment company whose name implies a certain type of portfolio composition must have at least 80% of its assets invested accordingly.

Question 9

Sales Literature with Performance must contain what?

Answer 9

1) A legend indicating the past performance does not guarantee future results. Must have phone number or website for current performance.
2) Must provide sales load or a disclosure informing the investor that sales loads can further reduce performance.
3) Returns for 1, 5 and 10 years, or since inception must be provided.

Question 10

Institutional Communication

Answer 10

Communications that are made available only to institutional investors such as banks,S&L, insurance company, b/d, governmental entity, investment adviser, 403b or 457 with more than 100 people.

• If a member has reason to believe that the communication will be forwarded to individual customers, it must be treated as a retail communication*

Question 11

Retail Communication

Answer 11

Any written/electronic communication that is distributed to more than 25 retail investors with in a 30 day period. Usually advertisements and sales literature. A principal must sign off unless

1) Another member has filed it with FINRA and they got a FINRA letter saying it’s ok.
2) The communication has not been materially altered.
3) The communication does not make any financial or investment recommendation.
4) Posted online in an interactive forum.

Question 12

Correspondence

Answer 12

Any written or electronic communication made available to fewer than 25 retail investors in a 30 day period.

Question 13

Public Appearance

Answer 13

Participation in any seminar, webinar, radio, tv or other public speaking event. Written procedures required to supervise appearance including education and training documentation. Evidence of supervisory procedure must be made available upon FINRA request. All materials used at the event is considered communication.

Question 14

Independently Prepared Reprint

Answer 14

Reprint of an article by in independent publisher. Must not be materially altered except to correct factual errors or the make it more consistent with regulatory standards. Must be pre approved by a principal.

Question 15

Research Report

Answer 15

A document prepared by an analyst or strategist to provide information to an investor on a security. Must not be influenced by conflicts of interest. Analyst cannot be paid by the firm.

Not considered reports… Discussions of broad based indices, commentaries on economic, political or market conditions, companies financial data, analyses of supply and demand based on trading volume and price.

Question 16

General Communication Standards

Answer 16

Communications must be based on principles of fair dealing and good faith. No material fact or qualification may be omitted. Exaggerated or misleading statements are prohibited.

The following needs to be considered per FINRA:

1) overall context of the statement.
2) audience to which the communication is directed.
3) overall clarity of the communication

Question 17

Making a Recommendation

Answer 17

There must be a reasonable basis to support the recommendation.
The following must be disclosed.
1) All transaction costs
2) Whether the firm intends to buy or sell for its own account.
3) Whether the firm or it’s officers own rights
4) Report any management of the security in the previous 12 months.

Question 18

Testimonials

Answer 18

Endorsement of an investment or service by a celebrity etc. The following must be disclosed…

• the fact that others may have a different experience.
• there is no guarantee of future performance or success
• More than $100 was paid for the testimonial.

Question 19

Comparisons of different securities

Answer 19

They must be clear and balanced. When comparing a taxable investment to a tax deferred investment, an illustration must use

• identical investment amounts
• identical rates of return
• rates of return cannot exceed 10%
• only federal income tax rates can be used.

Question 20

Disclosure of Member’s Name in Communications.

Answer 20

All communications and correspondence must:

1) Prominently disclose the name of the member
2) Disclose the relationship between any individual who is named and the member.
3) Reflect which products and services are provided by the member.

Question 21

Describe a Ranking Entity

Answer 21

Any entity that:

1) Provides general information about investment companies to the public.
2) Independent of the investment company
3) Cannot be procured by the investment company to provide ranking.

Question 22

Bond Mutual Fund Volatility Ratings

Answer 22

A description used by independent third parties to assess the sensitivity of a bond fund’s portfolio to changes in market conditions and the general economy. Only used in sales literature. Only allowed when the rating does not describe volatility as a risk rating, sale lit is current (most recent quarter) quantifiable, understandable and provides disclosure on its rating methodology to investors.

Ratings are based on the following

• Credit quality of the fund’s holdings.
• The market price volatility
• The fund’s performance
• Specific risks.

Question 23

Required disclosures for bond mutual fund volatility ratings

Answer 23

1) Name of entity that issued the rating.
2) Current rating + date and explanation of the change compared to prior rating
3) Statement that not all bond funds have volatility ratings.
4) Payments made in connection with the rating.
5) Description of the types of factors the rating measures.
6) Statement that the portfolio may have change since the date of the rating.
7) Statement the there is no guarantee that the fund will maintain its rating.

Question 24

Record Keeping Requirements

Answer 24

All retail communications and sales literature must be maintained for 3 years from the date of last use. A file showing the names of persons who prepared and approved correspondence must also be kept for 3 years.

Question 25

Filing Requirements

Answer 25

New Members must file retail communications at least 10 business days before the first use for 1 year. After 1 year they can file with in 10 days of first use.

• If there is a ranking or comparison in the communication, it must be filed 10 days before use even if the firm is more than 1 year old.*

Question 26

Filing Requirements for TV Ads.

Answer 26

If a member has filed a draft of a TV ad, they must also file the final filmed version with in 10 business days of the first broadcast.

Question 27

Exemptions form filing and Spot Check Requirements.

Answer 27

1) Communications previously filed with FINRA that have no material changes.
2) Communications that do not make financial or investment recommendations
3) Communication that only identifies a national securities exchange symbol of a member.
4) Communication that only identifies or offer a specific security at a stated price.
5) Press release to media only.
6) Reprint
7) Correspondence
8) Institutional communications
9) A listing of products
10) communications posted on an online interactive electronic forum
11) Press release for closed end investment companies

Question 28

Product Communications for VA and VL Products.

Answer 28

All communications must accurately and clearly describe the product as either a variable life or variable annuity. Must not be described as a mutual fund.

Question 29

VA and VL Liquidity

Answer 29

There can be no implication that variable annuities and variable life products are short term or liquid investments because there are substantial charges and tax penalties on withdrawals. Any statement about the ease if liquidation must be accompanied by the negative impacts such as cdsc, reduction in death benefits and tax penalties.

Question 30

VA and VL Guarantees

Answer 30

When guarantees are mentioned, the disclosure must mention that guarantees are based on the claims paying ability of the insurance company. There must be also no implication that the guarantee applies to the investment return or the value of the separate account. Also it may not be implied that the financial ratings apply to the separate account.

Question 31

SEC Rules for Hypothetical Illustrations

Answer 31

• They may not be used to predict investment results.
• Max investment return rate 12% provided that one of the returns provided is 0%
• Must reflect max M&E charges associated with the policy for each assumed rate of return
• VL product performance cannot be compared to other investment products. However VL and Term Insurance can be compared to demonstrate tax deferred growth.

Question 32

Telephone Solicitation

Answer 32

A telephone call initiated for the purpose of encouraging the purchase/investment in property goods or services.

Question 33

Telephone Consumer Protection Act of 1991

Answer 33

Any organization that performs telemarketing/cold calls must

• Maintain a Do Not Call list.
• Institute a written policy on maintenance procedures for the list.
• Train reps on using the list
• Ensure that reps record the names and numbers of customers who ask to NOT be called again.
• Anyone making cold calls must provide the firm’s name address and phone number.
• Calls can only be made between 8am and 9pm
• Copy of Do Not Call list cannot be more than 31 days old.
• exempt calls…
• calls made on behalf of a tax exempt nonprofit org.
• legitimate debt collection
• not made for commercial purpose

Question 34

Commingling SEC Rule 15c2-1

Answer 34

This rule prohibits a BD from commingling one customers securities with another customer as joint collateral for a bank loan unless there is written permission given by both parties. B/D’s can never commingle customers securities with firm securities.

Question 35

Rules for B/D activities on a Financial Institution’s premises.

Answer 35

• B/D must do its business in a location physically separated from the banks activities.
• The name of the BD firm must be clearly displayed.
• There must be a written agreement with the B/D and bank that allows the B/D to be accessed and audited by securities regulators.
• Customers must be informed orally and in writing that the securities are not FDIC insured or guaranteed by the bank. They are subject to investment risk

Question 36

Borrowing and Leading Rules

Answer 36

FINRA rules permit lending arrangements if :

1) There is an immediate family relationship between the Rep and the customer.
2) The customer is a financial institution who is in the business of providing credit, loans etc.

The remaining 3 require written approval from the firm before they can lend money.

3) The customer and the rep are both registered persons with the same firm.
4) The customer and Rep have a personal relationship outside the broker-customer relationship.
5) The customer and rep have a business relationship outside the broker-customer relationship.

Question 37

Sales Agreement Requirement

Answer 37

• It must detail the selling concessions that the BD will receive.
• Provide a complete description and schedule of available discounts and qualification requirements.
• It must also stipulate that all parties involved will abide by the Investment Company Act of 1940

Question 38

Sales Agreement Restrictions

Answer 38

• No member that is party to the agreement may purchase an open end investment at a price less than NAV.
• No member that is a principal underwriter for an open end investment company security may repurchase the security from a dealer that is not party to the sales agreement with the underwriter.
• Sales agreement must stipulate that if the principal underwriter made the original sale directly to the investor, the principal underwriter must forfeit the sales charge.

Question 39

Member to Member Pricing

Answer 39

A member may grant discounts only to other members that are parties to a written sales agreement. Non member broker dealers must pay the same prices, fees and commissions are the general public.

Question 40

Transmittal of Payment

Answer 40

Members engaging in the direct retail sales of mutual funds (wire orders) must transmit money received by the 3rd business day after the trade or by the end of the business day following the receipt of the customers payment, which ever is later.

Question 41

Antireciprocal Brokerage Rule

Answer 41

An investments company’s choice of a broker dealer to handle portfolio transactions and investments must be based on the b/d’s capabilities.

1) Members may not give a sales person an incentive or additional compensation based on the amount of commission received from the bd.
2) Recommend specific investment companies to sales people based on commission received from the recommended company.
3) Members may not use sales of shares in negotiating the amount of commission to be paid on a transaction.
4) Must not grant a sales person participation in brokerage commission if participation is identified with the sale of shares.

Question 42

Sharing of Commission

Answer 42

FINRA regulations prohibit the sharing of commissions by a registered representative unless the other person is registered with the same member and they have to receive the commissions directly from the bd.

Question 43

Class “A” shares

Answer 43

1) Charge a front end sales charge that may not exceed 8.5%
2) Max sales charge is reduced to 6.25% of certain features are not offered including Breakpoints and Rights of Accumulation.
3) May include 12b-1 fees which may not exceed .25%
4) Suitable for investors with a large amount to invest and a long time horizon

Question 44

Breakpoint

Answer 44

A schedule of discounts offered by a mutual fund to any person. A “person” refers to individuals, married couples, parents and their minor children and corporations. Any shares owned within in a family of funds may be used to determine the discount.

Question 45

Breakpoint Sales

Answer 45

FINRA prohibits reps from making higher commissions by selling shares in a dollar amount just below the point at which a sales charge is reduced. Reps must obtain information on the clients other account to verify if a breakpoint has been reached. Breakpoint information must be displayed in the prospectus and SAI.

Question 46

Letter of Intent

Answer 46

Written to inform a mutual fund company that a person will be investing more money in the same fund in order to reach a breakpoint.

• 13 months to reach the breakpoint.
• Letter may be back dated up to 90 days to include prior purchases.

Question 47

Service Fees

Answer 47

Fees paid to third parties for the maintenance of shareholders accounts. Fees are for shareholder liaison services, responding to customer inquiries, selling shares of the fund and providing ongoing information about their investments in the fund.

Question 48

Class “B” Shares

Answer 48

• A Back-end Sales charge is levied when shares are redeemed. The CDSC period is 6-8 years and fees are reduced as it gets closer to the end of the term.
• 12b-1 fees of up to .75% of net assets per year.
• Suitable for investors with a small amount and a long time horizon.

No Breakpoints.

Question 49

Class “C” Shares

Answer 49

• 12b-1 fees are up to .75% for the life of the account.
• There may be a backend fee but it is only levied for the first year.
• Suitable for investors with a short time horizon.
• Fees must be reviewed quarterly and renewed annually.
• Funds with 12b-1 fees non-interested persons must make up a simple majority of the board.

Question 50

Reinvestment of Distributions

Answer 50

Customers may reinvest dividends and capital gains if

1) new customers in the plan can also reinvest.
2) the plan is described in the prospectus
3) all shareholders are notified about dividend reinvestment at least once per year.
4) there are no additional costs to the issuer

Member firms are prohibited from selling the shares of any investment company if it has front end load or deferred sales charge imposed on shares purchased through the reinvestment program.

Doesn’t apply to companies registered with the SEC before 4/1/2000

Question 51

Customer Information that must be reviewed by the rep for suitability of variable products.

Answer 51

• discus liquidity, cdsc, IRS penalty fees, admin fee and advisory fees.
• insure the appl is complete and accurate.
• review investment objectives.
• do not place a disproportionate amount of the customers assets in variable products

Question 52

Section 35d-1 of Investment Company Act of 1940

Answer 52

It is materially deceptive and misleading if a fund name includes the following:

• Phrases suggesting a government guarantee.
• Suggesting that the fund is invested in certain industries unless 80% of the funds assets are in that industry.
• Suggesting investment in certain countries unless 80% in those countries.

Question 53

Recommendation to Non-institutional Accounts

Answer 53

The recommendation must be suitable. Items that must be checked.

1) financial situation including income and net worth.
2) tax status
3) investment objectives
4) risk tolerance
5) other holdings.

Question 54

Suitability Obligations to Institutional Customers.

Answer 54

Customers with at least $50 mil invested in securities.

• does the institution have the capability of independently evaluate the investment risk.
• the extent to which the institution makes independent investment decisions.

Question 55

Fair Dealing Violations

Answer 55

• recommending speculative securities without knowing the customers financial situation
• short term purchase and redemption of mutual funds
• setting up fictitious accounts to do illegal business
• making unauthorized transactions
• recommending purchases that the customer can’t afford.
• committing fraud such as forgery
• excessive trading to get commissions (churning)
• breakpoint sales
• conducting transactions that misrepresent the actual level of trading.
• failing to identify the source of a research report.
• front running, buying or selling a security before the customer makes a similar transaction.
• misuse of non public information
• blanket recommendation, making the same recommendation to all clients.

Question 56

Discretionary Accounts

Answer 56

An account with preapproved authority for a registered rep to make transactions without having to ask the customer for specific approval. A trading authorization or limited poa must be filed.

• discretionary orders must be identified as such at the time the order is entered.
• a principal must approve each order in writing (before or after order entry)
• supervisor must frequently review trading activity to prevent churning
• orders must be suitable with the customers investment objectives.

Question 57

FINRA Rule 5130

Answer 57

Prohibits member firms from selling a new common stock issue to any account which restricted persons have a beneficial interest.

• restricted persons include-
• any FINRA member bd.
• any officer, general partner, associated partner, or employee of a member
• finders and fiduciaries acting on behalf of the managing underwriter
• portfolio managers
• any person owning more than 10% of a firm
• immediate family of any of the above. Parents, mother or father in law, spouse, brother, sister, brother/sister in law, son/daughter in law, children and anyone they support directly.
• written representation that the account is eligible to purchase must be submitted within 12 months before the sale-

Question 58

Rule 2330 Members Responsibilities Regarding Deferred Variable Annuities

Answer 58

This rule applies to purchases and exchanges of deferred variable annuities and the initial sub account allocation. No member shall recommend the purchase or exchange of a deferred VA unless the member has a reasonable basis to believe that it is suitable.

Question 59

Specific Suitability Requirements for Deferred VA

Answer 59

These features must be discussed to determine suitability.

1) surrender schedule
2) mortality and expense fees
3) tax penalty prior to age 59.5
4) investment advisory fees
5) rider fees
6) market risk
7) insurance and investment components of the product.
8) the client made another VA exchange in the last 36 months.

Question 60

Required Suitability Information for Deferred VA

Answer 60

Prior to recommending a VA a reasonable attempt must be made to obtain the following…

• customers age
• annual income
• financial situation
• investment time horizon
• investment objectives
• existing assets
• net worth
• risk tolerance
• tax status

Question 61

Principal Review and Approval

Answer 61

A registered principal has to review and determine whether to approve a VA purchase no later than 7 business days after an OSJ receives the appl package. It must be reviewed prior to transmitting the appl to the insurance company for processing.

Question 62

Supervisory Procedures for VA

Answer 62

A member must establish and maintain specific written supervisory procedures designed to achieve compliance with rule 2330.

They must also

• implement surveillance procedures to determine if VA exchange rates are high among their reps. Check for inappropriate exchanges.
• have policies designed to implement corrective measures that address inappropriate exchanges.

Question 63

Rules for Handling Customer Funds

Answer 63

Members can hold a customers funds without investing them only if

1) the firm is holding the appl to allow completion of principal review.
2) reasonable efforts have been made to safeguard the check and promptly send the appl to an OSJ
3) the firm has policies and procedures to safeguard the check
4) principal reviews and determines whether to approve the purchase in 7 days
5) cannot hold funds or check longer than 7 business days.
6) maintains a copy of the check and the date the check was received.
7) create a record of the date when the OSJ received the appl