Section 5

Question 1

The ex-dividend date for a mutual fund is set by the fund or its principal underwriter.

Answer 1

The ex-dividend date for a mutual fund is set by the fund or its principal underwriter.

Question 2

Exchange or conversion of shares of one mutual fund for shares of another fund within the same “family”
or “complex” of funds is treated as a sale and repurchase for tax purposes.

Answer 2

Exchange or conversion of shares of one mutual fund for shares of another fund within the same “family”
or “complex” of funds is treated as a sale and repurchase for tax purposes.

Question 3

There is no secondary market for open-end mutual fund shares. Closed-end funds trade in the secondary OTC market or are listed on exchanges since they are not redeemable.

Answer 3

There is no secondary market for open-end mutual fund shares. Closed-end funds trade in the secondary OTC market or are listed on exchanges since they are not redeemable.

Question 4

NAV is another name for the “bid” price. The “ask” price is the offering price.

Answer 4

NAV is another name for the “bid” price. The “ask” price is the offering price.

Question 5

NAV and the ask price are one and the same on a no load mutual fund.

Answer 5

NAV and the ask price are one and the same on a no load mutual fund.

Question 6

The public offering price paid for an open-end mutual fund share includes the sales charge.

Answer 6

The public offering price paid for an open-end mutual fund share includes the sales charge.

Question 7

If the asked price is less than the NAV, it is a closed end mutual fund.

Answer 7

If the asked price is less than the NAV, it is a closed end mutual fund.

Question 8

The expense ratio of a mutual fund includes the fees paid to the transfer agent, custodian and investment adviser.

Answer 8

The expense ratio of a mutual fund includes the fees paid to the transfer agent, custodian and investment adviser.

Question 9

The expense of advertising and sales literature is paid out of the underwriter’s concession.

Answer 9

The expense of advertising and sales literature is paid out of the underwriter’s concession.

Question 10

“Mutuality” means that a mutual fund investor owns a proportionate, undivided interest in the whole
portfolio.

Answer 10

“Mutuality” means that a mutual fund investor owns a proportionate, undivided interest in the whole
portfolio.

Question 11

“Diversification” means the practice of spreading ones investments among the securities of different companies, industries, geographic areas or maturities.

Answer 11

“Diversification” means the practice of spreading ones investments among the securities of different companies, industries, geographic areas or maturities.

Question 12

A periodic payment plan is another name for a contractual plan (front-end load or spread).

Answer 12

A periodic payment plan is another name for a contractual plan (front-end load or spread).

Question 13

A prospectus contains the funds’ investment objectives, but must also state that there is no guarantee that
they will be met.

Answer 13

A prospectus contains the funds’ investment objectives, but must also state that there is no guarantee that
they will be met.

Question 14

A diversified fund must invest at least 75% of its assets so that no more than 5% of its assets are invested in any one company and they do not control more than 10% of the voting stock of any one company.

Answer 14

A diversified fund must invest at least 75% of its assets so that no more than 5% of its assets are invested in any one company and they do not control more than 10% of the voting stock of any one company.

Question 15

Money Market funds attempt to maintain a stable NAV. They are not insured by the government.

Answer 15

Money Market funds attempt to maintain a stable NAV. They are not insured by the government.

Question 16

Most funds offer the right of redemption at NAV without a redemption fee.

Answer 16

Most funds offer the right of redemption at NAV without a redemption fee.

Question 17

Open-end mutual funds may not issue senior securities (preferred stock or bonds), but closed end can.

Answer 17

Open-end mutual funds may not issue senior securities (preferred stock or bonds), but closed end can.

Question 18

The custodian is responsible for the safekeeping of all securities and cash held by the fund.

Answer 18

The custodian is responsible for the safekeeping of all securities and cash held by the fund.

Question 19

A list of all the fund’s shareholders is maintained by the transfer agent.

Answer 19

A list of all the fund’s shareholders is maintained by the transfer agent.

Question 20

NAV is increased by the appreciation of the securities held in the fund’s portfolio.

Answer 20

NAV is increased by the appreciation of the securities held in the fund’s portfolio.

Question 21

Dividends paid out by the fund result in a lower NA V .

Answer 21

Dividends paid out by the fund result in a lower NA V .

Question 22

A fund’s expense ratio is found by dividing the fund’s expenses by its average net asset value.

Answer 22

A fund’s expense ratio is found by dividing the fund’s expenses by its average net asset value.

Question 23

Reinvested income and gains are taxable in the year they are earned.

Answer 23

Reinvested income and gains are taxable in the year they are earned.

Question 24

Fund dividends are paid from interest income, stock dividends and short-term gains.

Answer 24

Fund dividends are paid from interest income, stock dividends and short-term gains.

Question 25

An LOI is for 13 months and may be backdated 90 days (Letter of Intent).

Answer 25

An LOI is for 13 months and may be backdated 90 days (Letter of Intent).

Question 26

A fixed UIT (Unit Investment Trust) is a type of investment company that buys and holds a fixed number of bonds until they reach maturity. There is no management fee.

Answer 26

A fixed UIT (Unit Investment Trust) is a type of investment company that buys and holds a fixed number of bonds until they reach maturity. There is no management fee.

Question 27

The maximum sales charge under FINRA rules is 8 1/2%. However, in order to charge 8 1/2% sales charge, the fund must offer breakpoints, the right of accumulation and the right to reinvest dividends at NAV. If they do not offer all three of these features, the maximum sales charge is limited to 61⁄4%.

Answer 27

The maximum sales charge under FINRA rules is 8 1/2%. However, in order to charge 8 1/2% sales charge, the fund must offer breakpoints, the right of accumulation and the right to reinvest dividends at NAV. If they do not offer all three of these features, the maximum sales charge is limited to 61⁄4%.

Question 28

Under the Investment Company Act of l940, the maximum sales charge on a contractual plan may not average more than 9% over the life of the plan (at least 10 years).

Answer 28

Under the Investment Company Act of l940, the maximum sales charge on a contractual plan may not average more than 9% over the life of the plan (at least 10 years).

Question 29

Net redemptions in a mutual fund over a period of time will occur if the value of the shares redeemed exceeds the value of the shares being purchased.

Answer 29

Net redemptions in a mutual fund over a period of time will occur if the value of the shares redeemed exceeds the value of the shares being purchased.

Question 30

12b-1 distribution fees must be disclosed in the prospectus and must be approved annually by shareholders. They are not paid out of the spread. They are an expense of the fund, like the management fee.

Answer 30

12b-1 distribution fees must be disclosed in the prospectus and must be approved annually by shareholders. They are not paid out of the spread. They are an expense of the fund, like the management fee.

Question 31

The investment objective of the fund must be approved annually by a majority vote of the shareholders and cannot be changed without shareholder approval.

Answer 31

The investment objective of the fund must be approved annually by a majority vote of the shareholders and cannot be changed without shareholder approval.

Question 32

With a Series 6 license, you can sell new open or closed end funds with a prospectus, but you cannot sell REITs, closed end funds in the secondary market, stocks, bonds or limited partnerships.

Answer 32

With a Series 6 license, you can sell new open or closed end funds with a prospectus, but you cannot sell REITs, closed end funds in the secondary market, stocks, bonds or limited partnerships.

Question 33

The investment adviser’s fee is paid from operating income of the mutual fund, but is based on assets.

Answer 33

The investment adviser’s fee is paid from operating income of the mutual fund, but is based on assets.

Question 34

Closed end mutual fund shares cannot be redeemed by the issuer. They must be sold in the secondary
market, on an exchange or OTC.

Answer 34

Closed end mutual fund shares cannot be redeemed by the issuer. They must be sold in the secondary
market, on an exchange or OTC.

Question 35

A Unit Investment Trust (UIT) has no management fee or board of directors.

Answer 35

A Unit Investment Trust (UIT) has no management fee or board of directors.

Question 36

The prices for closed end funds in the secondary market depend entirely upon how much clients are willing to pay (supply and demand).

Answer 36

The prices for closed end funds in the secondary market depend entirely upon how much clients are willing to pay (supply and demand).

Question 37

An increase in NAV in a mutual fund over a period of time is due to an increase in the value of the fund’s portfolio.

Answer 37

An increase in NAV in a mutual fund over a period of time is due to an increase in the value of the fund’s portfolio.

Question 38

Mutual funds cannot be compared to investments in banks.

Answer 38

Mutual funds cannot be compared to investments in banks.

Question 39

Capital gains cannot be included with dividends when calculating current yield of the mutual fund.

Answer 39

Capital gains cannot be included with dividends when calculating current yield of the mutual fund.

Question 40

The custodian for a mutual fund is usually a commercial bank.

Answer 40

The custodian for a mutual fund is usually a commercial bank.

Question 41

The “total” return on a mutual fund includes dividends, realized capital gains and unrealized capital gains (appreciation).

Answer 41

The “total” return on a mutual fund includes dividends, realized capital gains and unrealized capital gains (appreciation).

Question 42

SEC RULE 12b-1 DISTRIBUTION FEES
Mutual Funds that do not charge the full 8 1/2% sales charge can add a type of hidden sales charge under SEC Rule 12b-1. This rule allows the fund to serve as the distributor for its own shares, and to charge a percentage of the average net assets for distribution and sales-related expenses. The distribution plan must be in writing, and must be approved annually by the majority of the outstanding shares and by the board of directors, including a majority of the outside directors.

Answer 42

SEC RULE 12b-1 DISTRIBUTION FEES
Mutual Funds that do not charge the full 8 1/2% sales charge can add a type of hidden sales charge under SEC Rule 12b-1. This rule allows the fund to serve as the distributor for its own shares, and to charge a percentage of the average net assets for distribution and sales-related expenses. The distribution plan must be in writing, and must be approved annually by the majority of the outstanding shares and by the board of directors, including a majority of the outside directors.

Question 43

Many funds permit reinvestment of withdrawn funds within 120 days without a sales charge, but any gain is still taxable.

Answer 43

Many funds permit reinvestment of withdrawn funds within 120 days without a sales charge, but any gain is still taxable.

Question 44

12b-1 funds are permitted to reimburse themselves the cost of distribution.

Answer 44

12b-1 funds are permitted to reimburse themselves the cost of distribution.

Question 45

Diversification allows a loss in one fund to be offset by a gain in another.

Answer 45

Diversification allows a loss in one fund to be offset by a gain in another.

Question 46

Money market funds would not invest in long-term T-bonds.

Answer 46

Money market funds would not invest in long-term T-bonds.

Question 47

On a no load fund, the bid is equal to the ask price.

Answer 47

On a no load fund, the bid is equal to the ask price.

Question 48

Unit investment trusts have no management fees, but they do invest in a specified portfolio of securities.

Answer 48

Unit investment trusts have no management fees, but they do invest in a specified portfolio of securities.

Question 49

You cannot handle a trade of closed end funds trading on the NYSE with a Series 6 license – you should
decline the trade.

Answer 49

You cannot handle a trade of closed end funds trading on the NYSE with a Series 6 license – you should
decline the trade.

Question 50

Mutual fund investors are entitled to receive annual and semi-annual reports.

Answer 50

Mutual fund investors are entitled to receive annual and semi-annual reports.

Question 51

Entering into a fund withdrawal plan may deplete principal.

Answer 51

Entering into a fund withdrawal plan may deplete principal.

Question 52

Upon death of a tenant in common, there is no survivorship and only those shares owned by that tenant are included in his estate – ownership is fractional.

Answer 52

Upon death of a tenant in common, there is no survivorship and only those shares owned by that tenant are included in his estate – ownership is fractional.

Question 53

The “spread” is the difference between the public offering price and what the issuer receives. It is paid to the underwriter for distributing the shares.

Answer 53

The “spread” is the difference between the public offering price and what the issuer receives. It is paid to the underwriter for distributing the shares.

Question 54

A client who annuitizes a variable annuity over a fixed period will receive a variable amount for a fixed time.

Answer 54

A client who annuitizes a variable annuity over a fixed period will receive a variable amount for a fixed time.

Question 55

Variable life insurance death benefits may vary above the minimum guaranteed.

Answer 55

Variable life insurance death benefits may vary above the minimum guaranteed.

Question 56

Variable life insurance contracts offer the right of ‘conversion,’ which allows the insured to exchange the
policy for a fixed, guaranteed contract for a specified period of time.

Answer 56

Variable life insurance contracts offer the right of ‘conversion,’ which allows the insured to exchange the
policy for a fixed, guaranteed contract for a specified period of time.

Question 57

The AIR (assumed interest rate) is also known as the assumed investment rate.

Answer 57

The AIR (assumed interest rate) is also known as the assumed investment rate.

Question 58

The assumed investment rate is the rate that a variable annuity separate account must earn in order for the monthly payment to remain the same as it was last month.

Answer 58

The assumed investment rate is the rate that a variable annuity separate account must earn in order for the monthly payment to remain the same as it was last month.

Question 59

Applications for variable life insurance must be sent to the issuer promptly.

Answer 59

Applications for variable life insurance must be sent to the issuer promptly.

Question 60

The fee an insurer charges an annuitant to cover expenses due to increased longevity is called the
‘mortality’ fee.

Answer 60

The fee an insurer charges an annuitant to cover expenses due to increased longevity is called the
‘mortality’ fee.

Question 61

Mutual funds must send shareholders a check within seven calendar days of redemption.

Answer 61

Mutual funds must send shareholders a check within seven calendar days of redemption.

Question 62

The fee an insurer charges an annuitant to cover the expenses of operating the company is called the ‘administrative’ fee.

Answer 62

The fee an insurer charges an annuitant to cover the expenses of operating the company is called the ‘administrative’ fee.

Question 63

Variable/Universal life insurance has a flexible premium and a death benefit that can increase beyond the minimum guaranteed in the policy.

Answer 63

Variable/Universal life insurance has a flexible premium and a death benefit that can increase beyond the minimum guaranteed in the policy.

Question 64

Variable annuities have an IRS 10% penalty that applies to cash surrender prior to age 59 1/2, but Variable life insurance doesn’t.

Answer 64

Variable annuities have an IRS 10% penalty that applies to cash surrender prior to age 59 1/2, but Variable life insurance doesn’t.

Question 65

In a quote for an open end mutual fund, the NAV + the Sales Charge equals the ASK price.

Answer 65

In a quote for an open end mutual fund, the NAV + the Sales Charge equals the ASK price.

Question 66

The beneficiary designation will not affect the rate of return on a variable annuity during the
accumulation period.

Answer 66

The beneficiary designation will not affect the rate of return on a variable annuity during the
accumulation period.

Question 67

Although the guaranteed minimum death benefit of a Variable life policy is not subject to income tax, it is considered to be part of the insured’s estate upon death.

Answer 67

Although the guaranteed minimum death benefit of a Variable life policy is not subject to income tax, it is considered to be part of the insured’s estate upon death.

Question 68

On a variable annuity, the annuitant bears the investment risk since the insurer invests the money in the separate account.

Answer 68

On a variable annuity, the annuitant bears the investment risk since the insurer invests the money in the separate account.

Question 69

On a mutual fund, it is the transfer agent who is responsible for the disbursement of dividends and capital gains distributions to shareholders.

Answer 69

On a mutual fund, it is the transfer agent who is responsible for the disbursement of dividends and capital gains distributions to shareholders.

Question 70

On a mutual fund, it is the Board of Directors who sets the investment objectives of the fund, oversees the balance of the portfolio and decides how much cash to keep on hand.

Answer 70

On a mutual fund, it is the Board of Directors who sets the investment objectives of the fund, oversees the balance of the portfolio and decides how much cash to keep on hand.

Question 71

On a mutual fund, it is the Investment Adviser who provides investment advice in conformity with federal securities and tax law, researches and analyzes financial and economic trends and conforms to the investment objectives and policy decisions of the Board of Directors.

Answer 71

On a mutual fund, it is the Investment Adviser who provides investment advice in conformity with federal securities and tax law, researches and analyzes financial and economic trends and conforms to the investment objectives and policy decisions of the Board of Directors.

Question 72

A ‘voting trust company’ is a limited-life trust set up to center control of a corporation in the hands of a few individuals, called voting trustees. It is NOT a type of investment company.

Answer 72

A ‘voting trust company’ is a limited-life trust set up to center control of a corporation in the hands of a few individuals, called voting trustees. It is NOT a type of investment company.

Question 73

Shares of a closed-end mutual fund sell in the secondary market based upon ‘market demand’ (also known as supply and demand).

Answer 73

Shares of a closed-end mutual fund sell in the secondary market based upon ‘market demand’ (also known as supply and demand).

Question 74

A R/R with a Series 6 license could sell shares of a closed-end mutual fund ONLY in the primary market.

Answer 74

A R/R with a Series 6 license could sell shares of a closed-end mutual fund ONLY in the primary market.

Question 75

R/Rs with a Series 6 license cannot sell units of a REIT or a Limited Partnership.

Answer 75

R/Rs with a Series 6 license cannot sell units of a REIT or a Limited Partnership.

Question 76

To protect themselves in the event that an investor does not complete a Letter of Intent, most funds will hold in escrow some of the shares purchased.

Answer 76

To protect themselves in the event that an investor does not complete a Letter of Intent, most funds will hold in escrow some of the shares purchased.

Question 77

Systematic Withdrawals may prevent an investor from attaining their investment goals.

Answer 77

Systematic Withdrawals may prevent an investor from attaining their investment goals.

Question 78

Mutual fund investment advisory contracts must be approved by a majority vote of the fund’s
shareholders.

Answer 78

Mutual fund investment advisory contracts must be approved by a majority vote of the fund’s
shareholders.

Question 79

An open-end mutual fund has a Bid price of $13.17 and an Ask price of $14.22. To find the sales charge as a percentage of the offering price what would you do? Answer: Find the sales charge by subtracting $13.17 from $14.22, which is $1.05. Next, divide $1.05 by the Ask (or offering price) of $14.22, which is 7.38%.

Answer 79

An open-end mutual fund has a Bid price of $13.17 and an Ask price of $14.22. To find the sales charge as a percentage of the offering price what would you do? Answer: Find the sales charge by subtracting $13.17 from $14.22, which is $1.05. Next, divide $1.05 by the Ask (or offering price) of $14.22, which is 7.38%.

Question 80

The NAV of a fund will increase if the value of portfolio securities goes up.

Answer 80

The NAV of a fund will increase if the value of portfolio securities goes up.

Question 81

Fund total return figures must be shown for one, five and ten year periods.

Answer 81

Fund total return figures must be shown for one, five and ten year periods.

Question 82

A prospectus may not claim any future income projections for the fund.

Answer 82

A prospectus may not claim any future income projections for the fund.

Question 83

Variable life insurance is convertible into whole life for 24 months from inception.

Answer 83

Variable life insurance is convertible into whole life for 24 months from inception.

Question 84

On variable life, sales commissions are deducted from gross premium. All other expenses are deducted from the insurance company’s separate account.

Answer 84

On variable life, sales commissions are deducted from gross premium. All other expenses are deducted from the insurance company’s separate account.

Question 85

The death benefit (face amount) of a variable life policy may vary, above the minimum, according to the performance of the separate account maintained by the insurance company, but the premiums payable are fixed.

Answer 85

The death benefit (face amount) of a variable life policy may vary, above the minimum, according to the performance of the separate account maintained by the insurance company, but the premiums payable are fixed.

Question 86

Policy loans from cash value are permitted on variable life policies, but will be deducted from face amount if death occurs while a loan is outstanding.

Answer 86

Policy loans from cash value are permitted on variable life policies, but will be deducted from face amount if death occurs while a loan is outstanding.

Question 87

If a loan is taken from a variable life policy, that portion of cash value representing the loan value is transferred from the insurance company’s separate account into their general account while the loan is outstanding. Interest is still earned by the policyholder, but at a lower rate until the loan is paid back.

Answer 87

If a loan is taken from a variable life policy, that portion of cash value representing the loan value is transferred from the insurance company’s separate account into their general account while the loan is outstanding. Interest is still earned by the policyholder, but at a lower rate until the loan is paid back.

Question 88

The maximum sales charge allowed for a single premium immediate annuity must be reasonable under SEC rules.

Answer 88

The maximum sales charge allowed for a single premium immediate annuity must be reasonable under SEC rules.

Question 89

Sales charges on variable annuities and variable life insurance must be “reasonable” under SEC rules.

Answer 89

Sales charges on variable annuities and variable life insurance must be “reasonable” under SEC rules.

Question 90

Variable products have no guaranteed rate of return.

Answer 90

Variable products have no guaranteed rate of return.

Question 91

The client assumes the investment risk on a variable product.

Answer 91

The client assumes the investment risk on a variable product.

Question 92

To calculate the cash surrender value of an annuity, you need to know the value of the accumulation units next calculated (forward pricing).

Answer 92

To calculate the cash surrender value of an annuity, you need to know the value of the accumulation units next calculated (forward pricing).

Question 93

On a variable life product, there are guarantees on mortality, minimum death benefit and on administrative expenses, but there are no guarantees on cash values or rate of return.

Answer 93

On a variable life product, there are guarantees on mortality, minimum death benefit and on administrative expenses, but there are no guarantees on cash values or rate of return.

Question 94

On a variable annuity, the monthly payment will remain constant as long as the actual rate of return in the separate account is the same as the AIR.

Answer 94

On a variable annuity, the monthly payment will remain constant as long as the actual rate of return in the separate account is the same as the AIR.

Question 95

When annuitizing a non-qualified annuity, the income paid out to the annuitant will be partly non-taxable return of principal and partly ordinary income that is subject to tax.

Answer 95

When annuitizing a non-qualified annuity, the income paid out to the annuitant will be partly non-taxable return of principal and partly ordinary income that is subject to tax.

Question 96

No future projections concerning rates of return are permitted on variable annuities.

Answer 96

No future projections concerning rates of return are permitted on variable annuities.

Question 97

You must give out two prospectuses when selling variable life or variable annuities.

Answer 97

You must give out two prospectuses when selling variable life or variable annuities.

Question 98

A variable product would be suitable for a client concerned about inflation risk.

Answer 98

A variable product would be suitable for a client concerned about inflation risk.

Question 99

On a variable annuity, the client bears the investment risk.

Answer 99

On a variable annuity, the client bears the investment risk.

Question 100

To find the value of a variable annuity separate account during the pay in period, multiply the number of accumulation units by the value of one unit.

Answer 100

To find the value of a variable annuity separate account during the pay in period, multiply the number of accumulation units by the value of one unit.

Question 101

Insurers may guarantee a schedule of payments to a variable annuity owner, but may not guarantee the amount of the payments.

Answer 101

Insurers may guarantee a schedule of payments to a variable annuity owner, but may not guarantee the amount of the payments.

Question 102

If a fixed annuity client selects the fixed amount withdrawal option on his life income annuity, he will receive a fixed amount for a variable length of time (life span).

Answer 102

If a fixed annuity client selects the fixed amount withdrawal option on his life income annuity, he will receive a fixed amount for a variable length of time (life span).

Question 103

12b-1 distribution fees are paid by mutual fund shareholders.

Answer 103

12b-1 distribution fees are paid by mutual fund shareholders.

Question 104

Equity-indexed annuities are financial instruments in which the issuer, usually an insurance company, guarantees a stated interest rate and some protection from loss of principal, and provides an opportunity to earn additional interest based on the performance of a securities market index.

Answer 104

Equity-indexed annuities are financial instruments in which the issuer, usually an insurance company, guarantees a stated interest rate and some protection from loss of principal, and provides an opportunity to earn additional interest based on the performance of a securities market index.

Question 105

Some EIA are not registered under the Securities Act of 1933 based upon a determination that they fall strictly under state regulation.

Answer 105

Some EIA are not registered under the Securities Act of 1933 based upon a determination that they fall strictly under state regulation.

Question 106

EIA are complex investments that you will be required to be knowledgeable about.

Answer 106

EIA are complex investments that you will be required to be knowledgeable about.

Question 107

Although EIAs do not fall under the jurisdiction of the SEC, FINRA is concerned due to the product’s complexity that some associated persons may have difficulty understanding all of the features of the product and determining the extent to which those features meet the needs of the customer.

Answer 107

Although EIAs do not fall under the jurisdiction of the SEC, FINRA is concerned due to the product’s complexity that some associated persons may have difficulty understanding all of the features of the product and determining the extent to which those features meet the needs of the customer.

Question 108

EIAs are not suitable for all investors.

Answer 108

EIAs are not suitable for all investors.

Question 109

Surrender charges and the combination of caps and participation rates associated with a particular product
are factors that must be considered in any suitability determination.

Answer 109

Surrender charges and the combination of caps and participation rates associated with a particular product
are factors that must be considered in any suitability determination.

Question 110

FINRA Rule 3270 (Outside Business Activities of an Associated Person) requires that associated persons promptly notify their firm in writing if they intend to sell unregistered EIAs.

Answer 110

FINRA Rule 3270 (Outside Business Activities of an Associated Person) requires that associated persons promptly notify their firm in writing if they intend to sell unregistered EIAs.

Question 111

All recommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrenders are for the purpose of funding the purchase of an unregistered EIA.

Answer 111

All recommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrenders are for the purpose of funding the purchase of an unregistered EIA.

Question 112

Equity indexed annuities typically have a guaranteed minimum return of 90% of the premiums paid at a 3% annual interest rate.

Answer 112

Equity indexed annuities typically have a guaranteed minimum return of 90% of the premiums paid at a 3% annual interest rate.

Question 113

EIAs do have surrender charges and a 10% early withdrawal penalty on all withdrawals of earnings made under age 59 1/2, just like a fixed or variable annuity would have.

Answer 113

EIAs do have surrender charges and a 10% early withdrawal penalty on all withdrawals of earnings made under age 59 1/2, just like a fixed or variable annuity would have.

Question 114

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index.

Answer 114

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index.

Question 115

EIAs have less market risk than variable annuities due to the guaranteed interest rate.

Answer 115

EIAs have less market risk than variable annuities due to the guaranteed interest rate.

Question 116

EIAs also have the potential to earn returns better than that of traditional fixed annuities when the stock market is rising.

Answer 116

EIAs also have the potential to earn returns better than that of traditional fixed annuities when the stock market is rising.

Question 117

EIAs are sold by various insurance companies and are tied to different indexes depending upon which EIA is purchased, although most are indexed to the S&P 500.

Answer 117

EIAs are sold by various insurance companies and are tied to different indexes depending upon which EIA is purchased, although most are indexed to the S&P 500.

Question 118

The index-linked interest rate on an EIA depends upon the particular combination of indexing features that an EIA uses.

Answer 118

The index-linked interest rate on an EIA depends upon the particular combination of indexing features that an EIA uses.

Question 119

Features that are important to understand in determining the EIA index-linked return include participation rates, spread/margin/asset fee and interest rate caps.

Answer 119

Features that are important to understand in determining the EIA index-linked return include participation rates, spread/margin/asset fee and interest rate caps.

Question 120

A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means that the annuity would only be credited with 80% of the gain experienced by the index.

Answer 120

A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means that the annuity would only be credited with 80% of the gain experienced by the index.

Question 121

Spread/margin/asset fees are used by some insurance companies in addition to, or instead of, the participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10% and the spread/margin/asset fee is 3.5%, then the gain in the annuity would only be 6.5%.

Answer 121

Spread/margin/asset fees are used by some insurance companies in addition to, or instead of, the participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10% and the spread/margin/asset fee is 3.5%, then the gain in the annuity would only be 6.5%.

Question 122

Some EIAs may put a cap or an upper limit on your return (interest rate caps). This cap rate is generally stated as a percentage. This is the maximum interest that the annuity will earn. For example, if the index earned 10% and the cap rate was 8% then the gain in the annuity would only be 8%.

Answer 122

Some EIAs may put a cap or an upper limit on your return (interest rate caps). This cap rate is generally stated as a percentage. This is the maximum interest that the annuity will earn. For example, if the index earned 10% and the cap rate was 8% then the gain in the annuity would only be 8%.

Question 123

In some EIAs the insurance company is allowed to change participation rates, cap rates and spread/margin/asset fees annually. In other contracts the insurance company is only allowed to change these rates at the start of the next contract term. Changes in these rates could adversely affect a client’s return.

Answer 123

In some EIAs the insurance company is allowed to change participation rates, cap rates and spread/margin/asset fees annually. In other contracts the insurance company is only allowed to change these rates at the start of the next contract term. Changes in these rates could adversely affect a client’s return.

Question 124

Contributions into an EIA are in after tax dollars.

Answer 124

Contributions into an EIA are in after tax dollars.

Question 125

Life Settlements occur when the owner of a life insurance policies sells their interest to a third party for
less than the policy’s face amount, but more than the cash value.

Answer 125

Life Settlements occur when the owner of a life insurance policies sells their interest to a third party for
less than the policy’s face amount, but more than the cash value.

Question 126

Life settlements involving variable insurance policies are securities, and firms and associated persons involved in such transactions are subject to applicable FINRA rules. The value of a life settlement depends upon the insured’s life expectancy and the nature and terms of the policy primarily.

Answer 126

Life settlements involving variable insurance policies are securities, and firms and associated persons involved in such transactions are subject to applicable FINRA rules. The value of a life settlement depends upon the insured’s life expectancy and the nature and terms of the policy primarily.

Question 127

FINRA is concerned that aggressive marketing tactics, fueled by high commissions, may lead to inappropriate sales practices in connection with these transactions.

Answer 127

FINRA is concerned that aggressive marketing tactics, fueled by high commissions, may lead to inappropriate sales practices in connection with these transactions.

Question 128

Registered firms and their associated persons are under FINRA rules when recommending or facilitating a variable life settlement. Rules to be aware of include: suitability, due diligence, best execution, supervision and training and compensation.

Answer 128

Registered firms and their associated persons are under FINRA rules when recommending or facilitating a variable life settlement. Rules to be aware of include: suitability, due diligence, best execution, supervision and training and compensation.