Section 2

Question 1

A regulated investment company receives special tax treatment from the IRS

Answer 1

A regulated investment company receives special tax treatment from the IRS.

Question 2

Clients with traditional IRAs must start withdrawing their funds no later than age 70 1/2.

Answer 2

Clients with traditional IRAs must start withdrawing their funds no later than age 70 1/2.

Question 3

A teacher who invests funds in a 403(b) Tax Sheltered Annuity has no tax basis (zero), since 100% of the invested funds are before tax dollars, so upon distribution, all is taxable.

Answer 3

A teacher who invests funds in a 403(b) Tax Sheltered Annuity has no tax basis (zero), since 100% of the invested funds are before tax dollars, so upon distribution, all is taxable.

Question 4

Funds invested in a non-qualified annuity are after tax dollars and constitute the client’s tax basis. Upon distribution, only the earnings are taxable above the tax basis.

Answer 4

Funds invested in a non-qualified annuity are after tax dollars and constitute the client’s tax basis. Upon distribution, only the earnings are taxable above the tax basis.

Question 5

Public school teachers and employees of religious and charitable institutions and hospitals are all eligible for 403B Tax Sheltered Annuities, but not students of a state university.

Answer 5

Public school teachers and employees of religious and charitable institutions and hospitals are all eligible for 403B Tax Sheltered Annuities, but not students of a state university.

Question 6

In order to open an IRA funded by a mutual fund, the client must complete a new account form plus an IRA adoption agreement form.

Answer 6

In order to open an IRA funded by a mutual fund, the client must complete a new account form plus an IRA adoption agreement form.

Question 7

A prospectus is required when selling variable annuities, variable life insurance and/or mutual funds.

Answer 7

A prospectus is required when selling variable annuities, variable life insurance and/or mutual funds.

Question 8

The rights of an employee to pension plan benefits is called vesting.

Answer 8

The rights of an employee to pension plan benefits is called vesting.

Question 9

Deferred compensation plan benefits are not taxable until received by the employee.

Answer 9

Deferred compensation plan benefits are not taxable until received by the employee.

Question 10

Participants in a Deferred Compensation Plan may lose their money if the firm they work for goes broke - remember, deferred compensation plans are not vested, so employees are considered to be general creditors.

Answer 10

Participants in a Deferred Compensation Plan may lose their money if the firm they work for goes broke - remember, deferred compensation plans are not vested, so employees are considered to be general creditors.

Question 11

Early withdrawal from an IRA - before age 59 1/2 will result in tax as ordinary income plus a 10% penalty.

Answer 11

Early withdrawal from an IRA - before age 59 1/2 will result in tax as ordinary income plus a 10% penalty.

Question 12

A teacher who contributes to a tax-qualified annuity has a zero tax basis since the entire amount contributed was with before tax dollars.

Answer 12

A teacher who contributes to a tax-qualified annuity has a zero tax basis since the entire amount contributed was with before tax dollars.

Question 13

A non-qualified plan may be structured to favor certain individuals, since ERISA compliance is not required.

Answer 13

A non-qualified plan may be structured to favor certain individuals, since ERISA compliance is not required.

Question 14

A TSA (403B) plan may be written for nurses at a private hospital.

Answer 14

A TSA (403B) plan may be written for nurses at a private hospital.

Question 15

On a Keogh plan, you must cover all your full-time employees, over age 21 who have been employed for at least one year.

Answer 15

On a Keogh plan, you must cover all your full-time employees, over age 21 who have been employed for at least one year.

Question 16

Voluntary, after tax contributions to a qualified plan distributed to employees are not taxable since they
are treated as a return of capital.

Answer 16

Voluntary, after tax contributions to a qualified plan distributed to employees are not taxable since they
are treated as a return of capital.

Question 17

Students at a state college are not eligible for tax-deferred annuities, however, professors and staff are.

Answer 17

Students at a state college are not eligible for tax-deferred annuities, however, professors and staff are.

Question 18

529 plans vary by state.

Answer 18

529 plans vary by state.

Question 19

The maximum contribution allowed by any one person into a 529, all at once, is 5 times the current year’s gift tax exclusion.

Answer 19

The maximum contribution allowed by any one person into a 529, all at once, is 5 times the current year’s gift tax exclusion.

Question 20

529 plans may be set up for anyone.

Answer 20

529 plans may be set up for anyone.

Question 21

The amount contributed to a 529 is in after tax dollars.

Answer 21

The amount contributed to a 529 is in after tax dollars.

Question 22

The earnings of a 529 plan are free from federal income tax if the proceeds are used for higher educational expenses.

Answer 22

The earnings of a 529 plan are free from federal income tax if the proceeds are used for higher educational expenses.

Question 23

Coverdell ESA must be set up for a minor, under age 18.

Answer 23

Coverdell ESA must be set up for a minor, under age 18.

Question 24

The Coverdell ESA is funded with after tax dollars.

Answer 24

The Coverdell ESA is funded with after tax dollars.

Question 25

The earnings in a Coverdell ESA are federally income tax free if used for education expenses.

Answer 25

The earnings in a Coverdell ESA are federally income tax free if used for education expenses.

Question 26

Roth IRA contributions are always in after tax dollars.

Answer 26

Roth IRA contributions are always in after tax dollars.

Question 27

You can have both an IRA and a qualified plan where you work.

Answer 27

You can have both an IRA and a qualified plan where you work.

Question 28

You can have a qualified plan where you work and fund a Keogh if you also have self-employment income.

Answer 28

You can have a qualified plan where you work and fund a Keogh if you also have self-employment income.

Question 29

Roth IRA “qualified distributions” are federally income tax free.

Answer 29

Roth IRA “qualified distributions” are federally income tax free.

Question 30

Roth IRA distributions do not have to begin at age 70 1/2.

Answer 30

Roth IRA distributions do not have to begin at age 70 1/2.

Question 31

You can continue to fund a Roth IRA, no matter your age, so long as you have earned income.

Answer 31

You can continue to fund a Roth IRA, no matter your age, so long as you have earned income.

Question 32

Some clients will have an AGI too high to fund a Roth IRA.

Answer 32

Some clients will have an AGI too high to fund a Roth IRA.

Question 33

The prospectus is a summary of the Registration Statement filed with the SEC.

Answer 33

The prospectus is a summary of the Registration Statement filed with the SEC.

Question 34

Trading based upon insider information is not permitted and may result in both fines and jail.

Answer 34

Trading based upon insider information is not permitted and may result in both fines and jail.

Question 35

A regular customer is entitled to examine a broker/dealer’s balance sheet.

Answer 35

A regular customer is entitled to examine a broker/dealer’s balance sheet.

Question 36

You cannot share commission on mutual funds sales with a bank since the bank is not a member of FINRA. However, many banks have broker/dealer subsidiaries.

Answer 36

You cannot share commission on mutual funds sales with a bank since the bank is not a member of FINRA. However, many banks have broker/dealer subsidiaries.

Question 37

The Insider Trading Act of l988 makes you liable for acts of others you give inside information to, to the extent of your profits and to the extent of your losses avoided, plus possible imprisonment.

Answer 37

The Insider Trading Act of l988 makes you liable for acts of others you give inside information to, to the extent of your profits and to the extent of your losses avoided, plus possible imprisonment.

Question 38

The form sent to the client after the trade date, but before the settlement date, is called the confirmation.

Answer 38

The form sent to the client after the trade date, but before the settlement date, is called the confirmation.

Question 39

Selling dividends is unethical because the dividend is already included in the price the client pays for the
stock.

Answer 39

Selling dividends is unethical because the dividend is already included in the price the client pays for the
stock.

Question 40

SEC “Statutory Disqualification” means you cannot be affiliated with a broker/dealer in any capacity.

Answer 40

SEC “Statutory Disqualification” means you cannot be affiliated with a broker/dealer in any capacity.

Question 41

You must register as an investment adviser when selling research reports or investment letters for a fee.

Answer 41

You must register as an investment adviser when selling research reports or investment letters for a fee.

Question 42

The tax basis of a mutual fund share is stepped up or down to its fair market value at the decedent’s death. Basis is assumed on gifts.

Answer 42

The tax basis of a mutual fund share is stepped up or down to its fair market value at the decedent’s death. Basis is assumed on gifts.

Question 43

The marginal tax rate is the tax rate on your last dollar of income. Sometimes referred to as the last dollar tax.

Answer 43

The marginal tax rate is the tax rate on your last dollar of income. Sometimes referred to as the last dollar tax.

Question 44

Ordinary income tax is considered to be “progressive,” since the more you earn, the higher your tax rate.

Answer 44

Ordinary income tax is considered to be “progressive,” since the more you earn, the higher your tax rate.

Question 45

This is the opposite of a “regressive” tax, such as a sales tax, which is the same for everyone regardless of
income level.

Answer 45

This is the opposite of a “regressive” tax, such as a sales tax, which is the same for everyone regardless of
income level.

Question 46

Regressive taxes tend to penalize lower income persons, since the tax represents a higher percentage of their total income.

Answer 46

Regressive taxes tend to penalize lower income persons, since the tax represents a higher percentage of their total income.

Question 47

A self-employed person with a Keogh plan MUST also cover their full-time employees who have worked there at least one year and are at least age 21. They MAY cover eligible employees who are at least 18.

Answer 47

A self-employed person with a Keogh plan MUST also cover their full-time employees who have worked there at least one year and are at least age 21. They MAY cover eligible employees who are at least 18.

Question 48

A corporate officer who also works as a self employed consultant on weekends is eligible for a Keogh plan.

Answer 48

A corporate officer who also works as a self employed consultant on weekends is eligible for a Keogh plan.

Question 49

Contributions to a Roth IRA are never tax deductible.

Answer 49

Contributions to a Roth IRA are never tax deductible.

Question 50

Donors to Coverdell ESAs are not subject to any income requirements, although there are earned income
limitations.

Answer 50

Donors to Coverdell ESAs are not subject to any income requirements, although there are earned income
limitations.

Question 51

Taking cash surrender on a deferred annuity at age 65 would have much greater immediate tax implications than would annuitizing the contract over your lifetime.

Answer 51

Taking cash surrender on a deferred annuity at age 65 would have much greater immediate tax implications than would annuitizing the contract over your lifetime.

Question 52

A cash dividend used by an investor to buy more shares is taxable in the year of the distribution.

Answer 52

A cash dividend used by an investor to buy more shares is taxable in the year of the distribution.

Question 53

A capital gain will result when an investor buys a U.S. Government T-bond and later on sells it for more
than he paid for it.

Answer 53

A capital gain will result when an investor buys a U.S. Government T-bond and later on sells it for more
than he paid for it.

Question 54

Unrealized appreciation (paper profit) is not taxable.

Answer 54

Unrealized appreciation (paper profit) is not taxable.

Question 55

R/Rs may invite their pre-qualified accredited investors to a seminar discussing the merits of purchasing a private placement of Variable/Universal life insurance.

Answer 55

R/Rs may invite their pre-qualified accredited investors to a seminar discussing the merits of purchasing a private placement of Variable/Universal life insurance.

Question 56

An investor in a Muni bond mutual fund has received both dividends and capital gain distributions over a period of time which he automatically reinvested. If he exchanges his shares for shares of another fund in the same family, the IRS will treat the transaction as both a sale and a purchase. (remember, Muni capital gains are taxable)

Answer 56

An investor in a Muni bond mutual fund has received both dividends and capital gain distributions over a period of time which he automatically reinvested. If he exchanges his shares for shares of another fund in the same family, the IRS will treat the transaction as both a sale and a purchase. (remember, Muni capital gains are taxable)

Question 57

‘Selling dividends’ is a violation of the FINRA’s Rules of Conduct.

Answer 57

‘Selling dividends’ is a violation of the FINRA’s Rules of Conduct.

Question 58

The definition of an Investment Adviser includes anyone who prepares and sells research reports for a
fee.

Answer 58

The definition of an Investment Adviser includes anyone who prepares and sells research reports for a
fee.

Question 59

The Securities Exchange Act of 1934 regulates brokers, dealers, agents and the stock exchanges.

Answer 59

The Securities Exchange Act of 1934 regulates brokers, dealers, agents and the stock exchanges.

Question 60

Regulation D regarding private placements prohibits any advertising.

Answer 60

Regulation D regarding private placements prohibits any advertising.

Question 61

You could set up 529 College Savings Plans for your 35 year old sister and her children to help them with their college expenses.

Answer 61

You could set up 529 College Savings Plans for your 35 year old sister and her children to help them with their college expenses.

Question 62

You can contribute to a 529 College Savings Plan and name yourself as beneficiary.

Answer 62

You can contribute to a 529 College Savings Plan and name yourself as beneficiary.

Question 63

There are no income limitations on making contributions to a 529 College Savings Plan.

Answer 63

There are no income limitations on making contributions to a 529 College Savings Plan.

Question 64

Required Minimum Distribution rules apply to Traditional IRAs, but NOT Roth IRAs.

Answer 64

Required Minimum Distribution rules apply to Traditional IRAs, but NOT Roth IRAs.

Question 65

Required Minimum Distribution (RMD) rules require that participants begin withdrawals on a Traditional IRA no later than April 1st of the year after they turn age 70 1/2.

Answer 65

Required Minimum Distribution (RMD) rules require that participants begin withdrawals on a Traditional IRA no later than April 1st of the year after they turn age 70 1/2.

Question 66

Under RMD rules, there is a 50% IRS penalty levied upon the amount that should have been withdrawn, but wasn’t.

Answer 66

Under RMD rules, there is a 50% IRS penalty levied upon the amount that should have been withdrawn, but wasn’t.

Question 67

Contributions to a Roth IRA may be withdrawn at any time without tax or penalty.

Answer 67

Contributions to a Roth IRA may be withdrawn at any time without tax or penalty.

Question 68

On a Roth IRA, ‘qualified’ (tax and penalty free) distributions may be made if the participant has been in the IRA at least five years AND they are paid out after age 59 1/2, due to death or disability, OR for first time homebuyer expenses (up to $10,000).

Answer 68

On a Roth IRA, ‘qualified’ (tax and penalty free) distributions may be made if the participant has been in the IRA at least five years AND they are paid out after age 59 1/2, due to death or disability, OR for first time homebuyer expenses (up to $10,000).

Question 69

On a Traditional IRA, it is the 10% premature distribution penalty that is waived for first time homebuyer expenses, not the taxes.

Answer 69

On a Traditional IRA, it is the 10% premature distribution penalty that is waived for first time homebuyer expenses, not the taxes.

Question 70

Mutual Fund dividends may be taxed at long term capital gain rates or as ordinary income, as determined by the fund.

Answer 70

Mutual Fund dividends may be taxed at long term capital gain rates or as ordinary income, as determined by the fund.

Question 71

100% of an investor’s short term capital gain is taxed at the investor’s tax bracket. For example, if an investor had a short term capital gain of $1,000, the entire $1,000 would be taxable as ordinary income. If he was in a 25% tax bracket, $250 would be the tax due.

Answer 71

100% of an investor’s short term capital gain is taxed at the investor’s tax bracket. For example, if an investor had a short term capital gain of $1,000, the entire $1,000 would be taxable as ordinary income. If he was in a 25% tax bracket, $250 would be the tax due.

Question 72

An Investment Adviser managing a mutual fund, hedge fund or private fund must register federally with the SEC.

Answer 72

An Investment Adviser managing a mutual fund, hedge fund or private fund must register federally with the SEC.

Question 73

An Investment Adviser with $100,000,000 or more in assets under management must register federally with the SEC.

Answer 73

An Investment Adviser with $100,000,000 or more in assets under management must register federally with the SEC.

Question 74

An Investment Adviser managing less than $100,000,000 in assets must register at the state level.

Answer 74

An Investment Adviser managing less than $100,000,000 in assets must register at the state level.

Question 75

Form U-5 must be amended with address changes for a period of two years after it was first filed.

Answer 75

Form U-5 must be amended with address changes for a period of two years after it was first filed.

Question 76

Once a person files a Form U-5 they have two years to reapply with another firm without having to re- test. After two years they must take the necessary examinations again.

Answer 76

Once a person files a Form U-5 they have two years to reapply with another firm without having to re- test. After two years they must take the necessary examinations again.

Question 77

Non-cash compensation, such as a sales contest, is allowed if the rules are followed.

Answer 77

Non-cash compensation, such as a sales contest, is allowed if the rules are followed.

Question 78

The non-cash compensation arrangement must be based on the total production of associated persons with
respect to all investment company or variable product securities distributed by the member.

Answer 78

The non-cash compensation arrangement must be based on the total production of associated persons with
respect to all investment company or variable product securities distributed by the member.

Question 79

Non-cash compensation rules require that the credit received for each investment company or variable contract security must be equally weighted.

Answer 79

Non-cash compensation rules require that the credit received for each investment company or variable contract security must be equally weighted.

Question 80

Allowable Traditional IRA investments include: fixed-dollar retirement annuities, variable retirement annuities, bank certificates of deposit, mutual fund shares, gold and silver coins, gold bullion, real estate and self-directed brokerage accounts.

Answer 80

Allowable Traditional IRA investments include: fixed-dollar retirement annuities, variable retirement annuities, bank certificates of deposit, mutual fund shares, gold and silver coins, gold bullion, real estate and self-directed brokerage accounts.

Question 81

Products not permitted to fund IRAs are life insurance contracts and collectibles such as stamps, artwork, antiques and precious gems.

Answer 81

Products not permitted to fund IRAs are life insurance contracts and collectibles such as stamps, artwork, antiques and precious gems.

Question 82

A member may conduct a non-cash contest that includes the sales of mutual funds, variable annuities, and new assets under management so long as all three product categories are included and the contest is based upon total production and no preferential credits are given. The non-cash award must be calculated on the basis of the equal weighting requirements of FINRA Rule 2320 and NASD Rule 2830.

Answer 82

A member may conduct a non-cash contest that includes the sales of mutual funds, variable annuities, and new assets under management so long as all three product categories are included and the contest is based upon total production and no preferential credits are given. The non-cash award must be calculated on the basis of the equal weighting requirements of FINRA Rule 2320 and NASD Rule 2830.

Question 83

Whether a sales contest is sponsored by a broker/dealer or its parent life insurance company, FINRA Rule 2320 requires that the sales contest include all variable products distributed by the member.

Answer 83

Whether a sales contest is sponsored by a broker/dealer or its parent life insurance company, FINRA Rule 2320 requires that the sales contest include all variable products distributed by the member.

Question 84

Sales contest rules do not apply to the sales of fixed insurance products.

Answer 84

Sales contest rules do not apply to the sales of fixed insurance products.

Question 85

FINRA Rule 2320 prohibits an associated person from accepting non-cash compensation.

Answer 85

FINRA Rule 2320 prohibits an associated person from accepting non-cash compensation.

Question 86

Non-cash credits may be given to registered representatives based on gross dealer concession so long as the contest meets all of the requirements of the FINRA rules 2320 and NASD Rule 2830, including the equal weighting requirement. The amounts of non-cash credits for representatives based on dealer concessions must be equally weighted among different funds.

Answer 86

Non-cash credits may be given to registered representatives based on gross dealer concession so long as the contest meets all of the requirements of the FINRA rules 2320 and NASD Rule 2830, including the equal weighting requirement. The amounts of non-cash credits for representatives based on dealer concessions must be equally weighted among different funds.

Question 87

NASD Rule 2830 permits contributions by a member to a non-cash arrangement of a non-member, such as a bank, provided that the arrangement conforms with the criteria in NASD Rule 2830, including the total production and equal weighting requirements.

Answer 87

NASD Rule 2830 permits contributions by a member to a non-cash arrangement of a non-member, such as a bank, provided that the arrangement conforms with the criteria in NASD Rule 2830, including the total production and equal weighting requirements.

Question 88

FINRA Rule 2320 and NASD Rule 2830 require that registered representatives only accept compensation from the member with whom they are associated unless, among other things, an interpretive or no-action letter specifically permits such an arrangement.

Answer 88

FINRA Rule 2320 and NASD Rule 2830 require that registered representatives only accept compensation from the member with whom they are associated unless, among other things, an interpretive or no-action letter specifically permits such an arrangement.

Question 89

An offeror may conduct and pay for a training and education meeting for registered representatives of unaffiliated dealers that sell the offeror’s products so long as neither the attendance at the meeting nor the payment for the meeting is pre-conditioned on the achievement of a sales target, and approval from the member is obtained prior to the meeting.

Answer 89

An offeror may conduct and pay for a training and education meeting for registered representatives of unaffiliated dealers that sell the offeror’s products so long as neither the attendance at the meeting nor the payment for the meeting is pre-conditioned on the achievement of a sales target, and approval from the member is obtained prior to the meeting.

Question 90

NASD Rule 2830 prohibits conditioning attendance at a training or educational meeting held by an offeror on the achievement of a sales target or any other incentive.

Answer 90

NASD Rule 2830 prohibits conditioning attendance at a training or educational meeting held by an offeror on the achievement of a sales target or any other incentive.

Question 91

A member firm may reimburse its associated persons for the expenses of their guests that attend training and educational seminar. An offeror may not.

Answer 91

A member firm may reimburse its associated persons for the expenses of their guests that attend training and educational seminar. An offeror may not.

Question 92

The non-cash compensation rules apply to any associated person, including officers and managers of members, if they receive directly or indirectly, such compensation in connection with the sale and distribution of variable contracts or investment company securities.

Answer 92

The non-cash compensation rules apply to any associated person, including officers and managers of members, if they receive directly or indirectly, such compensation in connection with the sale and distribution of variable contracts or investment company securities.

Question 93

FINRA Rule 2320 prohibits members and associated persons of members from receiving compensation from an offeror in the form of securities of any kind.

Answer 93

FINRA Rule 2320 prohibits members and associated persons of members from receiving compensation from an offeror in the form of securities of any kind.

Question 94

An associated person is allowed to receive stock or stock options of the member’s parent company as compensation.

Answer 94

An associated person is allowed to receive stock or stock options of the member’s parent company as compensation.

Question 95

Insurance company wholesalers may receive stock options of the insurance company’s parent holding company as compensation as the specified production levels are in compliance with the equal weighting and total production requirements of Rules 2320 or 2830.

Answer 95

Insurance company wholesalers may receive stock options of the insurance company’s parent holding company as compensation as the specified production levels are in compliance with the equal weighting and total production requirements of Rules 2320 or 2830.

Question 96

An offeror may provide a registered representative with business development and education enhancement items, provided that these items are not preconditioned on the achievement of a sales target.

Answer 96

An offeror may provide a registered representative with business development and education enhancement items, provided that these items are not preconditioned on the achievement of a sales target.

Question 97

Gifts of a personal nature, such as wedding gifts or congratulatory gifts for the birth of a child, do not fall under FINRA rule 2320 and NASD Rule 2830.

Answer 97

Gifts of a personal nature, such as wedding gifts or congratulatory gifts for the birth of a child, do not fall under FINRA rule 2320 and NASD Rule 2830.

Question 98

FINRA Rule 2320 and NASD Rule 2830 do not apply to promotional items of nominal value that display the offeror’s logo, such as golf balls, shirts, towels and pens.

Answer 98

FINRA Rule 2320 and NASD Rule 2830 do not apply to promotional items of nominal value that display the offeror’s logo, such as golf balls, shirts, towels and pens.