Test 1 Flashcards
A “SPDR” is a(n):
A. ETF
B. ADR
C. ARS
D. VRDO
The best answer is A.
The “SPDR” is the Standard and Poor’s Depositary Receipt, one of the first index-ETFs. It is based on the composition of the Standard and Poor’s 500 Index. An ADR is an American Depositary Receipt. This is the vehicle for trading foreign stocks in the U.S. An ARS is an Auction Rate Security and a VRDO is a Variable Rate Demand Obligation.
When comparing fixed annuity contracts to variable annuity contracts, the customer should be made aware that:
I fixed annuities guarantee a rate of return that is not affected by investment risk
II variable annuities guarantee a rate of return that is not affected by investment risk
III fixed annuity payments depend on the performance of the securities held in the underlying separate account
IV variable annuity payments depend on the performance of the securities held in the underlying separate account
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
Fixed annuities are an insurance product that guarantee a fixed return to the purchaser - here the insurance company bears the investment risk. On the other hand, variable annuities do not guarantee a fixed return - the annuity payment will vary with the performance of the underlying mutual fund investments that fund the annuity.
An option contract that is exercisable only on the expiration date is a(n):
A. spot contract
B. American contract
C. European contract
D. cash contract
The best answer is C.
“American” style options are exercisable at any time until expiration. “European” style options are only exercisable on the expiration date, not before.
In November, a customer buys 1 ABC Jan 70 Call @ $4 when the market price of ABC is $71. If the customer closes out the position prior to expiration by selling the call at $3, the gain or loss is?
A. $100 gain
B. $100 loss
C. $300 gain
D. $400 gain
The best answer is B.
The customer bought the call (opening purchase) for a $4 premium and then closed with a sale of the contract at $3 for a $100 loss.
Under Keogh rules, distributions from a Keogh Plan must commence the year after the individual turns age:
A. 55
B. 59 1/2
C. 60 1/2
D. 70 1/2
The best answer is D.
Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 70 1/2.
A bond trade takes place at 10:00AM on Monday, July 10th for “cash”. Settlement takes place:
A. before 2:30 PM on July 10th
B. before 2:30 PM on July 11th
C. during business hours on July 15th
D. during business hours on July 17th
The best answer is A.
Cash settlement is same day settlement, before 2:30 PM.
To sell variable annuities, salespersons must be registered with (the):
I FINRA
II State Insurance Commission
III State Banking Commission
IV State Securities Commission
A. I and IV only
B. II and III only
C. I, II and IV
D. I, II, III, IV
The best answer is C.
To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. The salesperson must also be registered in the state to sell this non-exempt security under the state’s “Blue Sky” laws. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.
Monetarist Theory states that the economy is stimulated by:
A. the actions of the Federal Reserve
B. increased Government spending
C. tax rate reductions
D. decreased Government spending
The best answer is A.
Monetarists claim that the actions of the Federal Reserve Board to tighten or loosen credit are the driving force behind economic cycles.
Which of the following option positions is used to hedge a short stock position?
A. long call
B. short call
C. long put
D. short put
The best answer is A.
When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the market rises, the loss potential is unlimited. The purchase of a call allows the stock to be bought in at a fixed price, limiting upside risk.
A non-durable power of attorney signed by a customer:
I remains in force upon the death of the customer
II is terminated upon the death of the customer
III remains in force upon the mental incapacitation of the customer
IV is terminated upon the mental incapacitation of the customer
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D.
Any power of attorney, durable or non-durable, is terminated when a customer dies. The distinction between a durable and a non-durable power of attorney is that a non-durable power of attorney terminates if the grantor is mentally incapacitated whereas durable power of attorney remains in force if the grantor is mentally incapacitated.
At issuance, the exercise price of a warrant is set at:
A. a discount to the current market price of that issuer’s common stock
B. the current market price of that issuer’s common stock
C. a premium to the current market price of that issuer’s common stock
D. any of the above, depending on market conditions
The best answer is C.
At issuance, the exercise price of a warrant is set higher than the current market price of the stock. The stock’s price must appreciate for the warrant to have any intrinsic value. Stock warrants can be attached to preferred stock and bond offerings to make them more attractive to potential purchasers.
Which of the following would be described as an oil and gas program overriding royalty interest arrangement?
A. The general partner bears no costs; and gets a percentage of oil revenue from the first barrel sold
B. The general partner bears the tangible costs; and the limited partner bears the intangible drilling costs
C. The general partner bears the intangible drilling costs; and the limited partner bears the tangible costs
D. The general partner defers taking a percentage of oil revenues until all costs laid out by the limited partners are recovered
The best answer is A.
Choice A describes an overriding royalty interest. In such a sharing arrangement, the limited partners bear all costs and the general partner puts up nothing. The general and limited partners share oil revenue from the first barrel sold.
Choice B describes a functional allocation sharing arrangement. In such a sharing arrangement, the limited partners bear the immediately deductible intangible drilling costs, while the general partner bears the tangible costs (recovered through depreciation over a period of time).
Choice C doesn’t exist.
Choice D describes a “reversionary working interest” sharing arrangement, where the general partner puts up nothing, and the limited partners pay for everything. However, the general partner defers taking his or her percentage of oil revenue until all limited partner costs are recovered.
Underwriting selling group members act as:
A. agent for the syndicate, selling the new issue and take liability for any unsold portion of the new issue
B. agent for the syndicate, selling the new issue but take no liability for any unsold portion of the new issue
C. principal for the syndicate, selling the new issue and take liability for any unsold portion of the new issue
D. principal for the syndicate, selling the new issue but take no liability for any unsold portion of the new issue
The best answer is B.
Selling group members in a new issue underwriting group act as agent for the syndicate, helping the syndicate to sell the new issue, earning a selling concession on each share (or bond) sold. However, unlike the syndicate members, they take no liability for unsold shares.
Which rollovers are permitted without tax due?
I Exchange of one variable annuity contract for another variable annuity contract
II Exchange of a life insurance contract for a variable annuity contract
III Exchange of a variable annuity contract for a life insurance contract
IV Exchange of a life insurance contract for another life insurance contract
A. I and II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV
The best answer is C.
Section 1035 “tax-free” exchanges permit “like-for-like” exchanges without tax due. Thus, Choices I and IV are tax free. It also permits a life insurance policy to be exchanged for a variable annuity without tax due, making Choice II true. Of course, the IRS is happy about this because the taxable annuity payments will start earlier than the payment of the taxable death benefit.
However, a variable annuity cannot be exchanged tax-free for an insurance policy under this tax rule, making Choice III false. If there is a gain in the separate account, it would be taxed upon exchange for a life insurance policy.
OEX index LEAPs are issued:
A. American style
B. European style
C. Asian style
D. Either American or European style
The best answer is A.
Regular stock options, LEAPs on these issues, OEX index options, and OEX LEAPs, are all American style options that are exercisable by the holder at any time.
Almost all other index options, on the other hand, are European style options. Such an option is only exercisable at expiration, not before. Prior to expiration, the contract can be traded; but cannot be exercised.
When a variable annuity contract is “annuitized,” which statements are TRUE?
I The number of annuity units is fixed
II The number of annuity units is variable
III The annuity unit value is fixed
IV The annuity unit value is variable
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
When a variable annuity contract is annuitized, the accumulation units are converted into a fixed number of annuity units. This calculation is based on the dollar value of the accumulation units, the annuity option chosen, and the customer’s expected mortality. The fixed number of annuity units times the unit value (which varies with the performance of the mutual fund held in the separate account) determines the monthly payment.
Which of the following securities deliveries are “good”?
I Guardian securities with an assignment performed by the legal guardian
II Trust securities with an assignment performed by the Trustee
III Partnership securities with an assignment performed by a partner designated in the Partnership Agreement
IV Custodian securities with an assignment performed by the recipient of the gift
A. II, III, IV
B. I, II, III
C. I, II, IV
D. I, III, IV
The best answer is B.
Custodian account securities cannot be assigned by the minor. The minor has no legal authority. Any assignment must be made by the custodian. Guardian account securities are assigned by the legal court appointed guardian; partnership securities are assigned by a partner designated in the partnership agreement; and trust account securities must be assigned by the designated trustee.
An order ticket is filled out and sent for execution to the NYSE. After being executed on the NYSE, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the:
A. Registered Representative
B. Specialist (DMM)
C. Branch office manager
D. Floor Governor
The best answer is C.
Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a “designated person” such as a branch office manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.
A customer buys 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. The breakeven point is:
A. $52
B. $56
C. $64
D. $68
The best answer is B.
The holder of the put paid a $4 premium per share for the right to sell ABC stock at $60. The customer’s net sale proceeds upon exercise equals $56 per share. To breakeven, the customer must buy the stock in the market at this price. To summarize, the formula for breakeven on a long put is:
Long put breakeven = strike price - premium
Which individuals can join together and qualify for a breakpoint on their aggregate purchases of mutual funds?
A. Family members in the same household
B. Members of an investment club
C. Limited partners who form a partnership to make the purchase
D. All of the above
The best answer is A.
Unrelated investors cannot “join together” to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint.
Which statements are TRUE about Eurodollar bonds?
I The bonds are issued in bearer form
II U.S. corporate issuers are not subject to foreign currency risk
III Foreign corporate issuers are not subject to foreign currency risk
IV Trading is centered in the European market
A. I and II only
B. II and III only
C. I, II, IV
D. I, II, III, IV
The best answer is C.
Eurodollar bonds are issued in bearer form outside the U.S. Trading is centered in London. Because the bonds are payable only in dollars, U.S. based issuers do not run any foreign currency risk. If foreign currency values rise, it has no effect on the issuer who pays in dollars. On the other hand, foreign issuers of Eurodollar bonds are subject to foreign currency risk. For example, if a British corporation issues Eurodollar bonds, and the British Pound declines in value relative to the dollar, then it will cost the British company more (in Pounds) to pay the debt service on the bonds.
In a municipal bond contract, a “covenant of defeasance” would allow the issuer to:
A. redeem the issue in part or full at predetermined date(s) and prices
B. advance refund the issue under the terms specified in the bond contract
C. omit interest or principal repayments if coverage ratios decline below specified limits
D. reset interest rates periodically at predetermined dates based upon recognized interest rate indices
The best answer is B.
A municipal “covenant of defeasance” allows the issuer to “advance refund” the bond issue under the terms specified in the bond contract. An issuer will take advantage of this covenant if interest rates have dropped and the issue is not currently callable. To advance refund the issue, the issuer buys enough U.S. Government securities to meet the debt service requirements on the issue and places then in escrow with a trustee. The maturity on the U.S. Governments matches the maturity (or first call date) of the outstanding bonds. The interest payments received from the U.S. Governments are used to meet the debt service requirements. When the U.S. Governments mature, the proceeds are used to retire the issuer’s debt. By advance refunding, the issuer removes the existing debt as its own liability, freeing it to issue new debt at lower current interest rates.
A customer contributed $50,000 to a variable annuity contract. The account value has grown over the years and the NAV is now $70,000. The customer is now age 60, and takes a lump-sum distribution of $25,000 to pay for expenses. Which statement is TRUE?
A. The entire $25,000 distribution is not taxable
B. $5,000 of the distribution is taxable and $20,000 is not taxable
C. $20,000 of the distribution is taxable and $5,000 is not taxable
D. The entire $25,000 distribution is taxable
The best answer is C.
Variable annuity contributions are not tax-deductible. Earnings in the account build tax-deferred. When distributions are taken, tax is due on the portion that represents the tax-deferred build-up. The portion that represents the original contribution (already taxed dollars) is returned without any further tax due. If a lump-sum distribution is taken, the IRS uses LIFO (Last-In; First-Out) accounting. The Last-In Dollars are the tax-deferred build-up, so these are the First-Out dollars and they are 100% taxable! Any distribution above and beyond the build-up amount is a tax-free return of original capital.
In this example, the customer contributed $50,000 and this has grown, tax-deferred, to $70,000. If a lump sum distribution of $25,000 is taken, the first dollars out are the $20,000 of never taxed build-up and this amount is taxable. The remaining $5,000 is a partial tax-free return of the original $50,000 investment (which was not tax deductible).
If a couple that is not covered by another qualified retirement plan makes over $118,000 in year 2016, IRA contributions are:
I permitted
II not permitted
III tax deductible
IV not tax deductible
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed is $5,500 each ($11,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $118,000 in year 2016 (the deduction phases out between $98,000 - $118,000 of income).
Which of the following statements are TRUE about Treasury Receipts?
I The underlying securities are backed by the full faith and credit of the U.S. Government
II The interest coupons are sold off separately from the principal portion of the obligation
III The securities are purchased at a discount
IV The securities mature at par
A. I and II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV
The best answer is D.
Treasury Receipts are zero coupon Treasury obligations (which are directly backed by the full faith and credit of the U.S. Government) created by broker/dealers who buy Treasury Bonds or Treasury Notes and strip them of their coupons, keeping the corpus of the bond only. The bonds are put into a trust, and “units” of the trust are sold to investors. Treasury Receipts are purchased at a discount and mature at par. The discount earned over the life of the bond is the “interest income.”
Once the Federal government started “stripping” bonds itself (in 1986) and selling them to investors, this market evaporated. However, 30 year T-Receipts will trade until they all mature.
During periods when interest rates are rising, which of the following statements are TRUE?
I Bonds with low coupon rates exhibit the greatest price volatility
II Bonds with high coupon rates exhibit the greatest price volatility
III To minimize price volatility, low coupon bonds are appropriate investments
IV To minimize price volatility, high coupon bonds are appropriate investments
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
Bonds with the lowest price volatility will be ones with the highest coupon rate. Bonds with low coupon rates exhibit greater price volatility, with the most volatile bond being a zero-coupon bond. Thus, to minimize price volatility due to interest rate movements (“interest rate risk”), high coupon bonds are more appropriate than low coupon bonds.
All of the following statements are true about SEP IRAs EXCEPT:
A. the plan is established by the employer
B. the plan allows for flexible contribution amounts
C. the amount that can be contributed is significantly greater than for a Traditional IRA
D. the contributions made are not deductible
The best answer is D.
A SEP IRA is a “Simplified Employee Pension” plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $53,000 in 2016). The employer sets the actual contribution percentage, which must be the same for all employees.
A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a small business that has variable cash flow.
Which of the following statements are TRUE regarding the taxation of a municipal security?
I Capital gains from selling municipal bonds are exempt from Federal and State tax if the bond is owned by a resident of that State
II Capital gains from selling municipal bonds are subject to Federal and State tax
III Interest income received from municipal bonds is exempt from Federal and State tax if the bond is owned by a resident of that State
IV Interest income received from municipal bonds is subject to Federal and State tax
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
Capital gains on municipal securities are taxable at the Federal, State and Local levels. Only the interest income from municipal securities is exempt from Federal income tax; it is still subject to State and Local tax unless the bond is purchased by a resident of that State.
On the same day in a margin account, a customer buys 5 ABC January 40 Calls @ $6 and sells 15 ABC January 50 Calls @ $1 when the market price of ABC is at $43. The maximum potential loss is:
A. $1,500
B. $2,000
C. $3,000
D. unlimited
The best answer is D.
This is a very difficult question. The customer is taking the following positions:
Buy 5 ABC Jan 40 Calls @ $6
Sell 5 ABC Jan 50 Calls @ $1
$5 Debit
Sell 10 ABC Jan 50 Calls @ $1 Credit
The customer is creating 5 “long call spreads” and has 10 naked calls. In effect, he is writing 3 times the number of short calls needed to create the spread. Therefore he is “writing at a 3:1 ratio.” This is termed a ratio spread. Long call spreads are used when a customer is moderately bullish, and wishes to reduce the cost of the long position by selling an equal number of “out the money” calls. This limits upside gain potential, but also reduces the cost of the positions. By writing three times the number of calls, the customer further reduces the cost of the positions, but also assumes unlimited upside risk on the 10 naked calls that are left.
Which SEC rule gives a simplified registration process to offerings of no more than $50 million within a 12 month time frame?
A. Rule 144
B. Rule 144A
C. Regulation A
D. Regulation D
The best answer is C.
Regulation A is intended to make it easier for start-up companies to raise capital. It gives an “E-Z” registration method for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2.
Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements.
Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements.
An abbreviated registration statement is filed with the SEC (Form S1-A) and the issue must go through a 20 day review period, similar to a regular registered offering. Disclosure to investors is made through an Offering Circular rather than a Prospectus.
Regarding the flow of funds set forth in a municipal bond contract, collected monies would FIRST be deposited to the:
A. Operations and Maintenance Fund
B. Debt Service Reserve Fund
C. Revenue Fund
D. Reserve Maintenance Fund
The best answer is C.
The trust indenture of a revenue bond issue includes a “flow of funds” - meaning how revenues will be applied by the issuer. As revenues are collected, they are deposited to a revenue fund, also called a general collection account. The monies are then applied, in sequence, to the operation and maintenance account; sinking fund; debt service reserve fund; reserve maintenance fund; renewal and replacement fund; and finally to the surplus fund.
A customer in the 28% tax bracket has $6,000 of capital gains and $9,000 of capital losses. How much unused loss is carried forward to the next tax year?
A. 0
B. $3,000
C. $6,000
D. $9,000
The best answer is A.
The customer has a capital gain of $6,000 and a capital loss of $9,000 for a net capital loss of $3,000. Since $3,000 of net capital losses can be deducted in a tax year, the entire loss can be deducted and there is no loss carryforward.
All of the following are considered to be “insiders” EXCEPT:
A. an investor holding 11% of ABC preferred stock
B. the in-house counsel of ABC Corporation
C. the spouse of ABC Corporation’s President
D. ABC Corporation’s Chief Executive Officer
The best answer is A.
An insider is defined as an officer, director, 10% common shareholder or “affiliated person.” The Chief Executive officer of the corporation is an officer; the President’s spouse is an “affiliated person.” Court decisions have extended the definition of an insider to include almost anyone who has “material non-public information” about the company. Because of this, an in-house lawyer is considered an “insider.” An investor who holds non-convertible bonds or preferred stock of the company is not an insider - he or she is not in a position to get non-public information.
A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 12%. Which of the following are TRUE statements about the outstanding 10% issue?
I The current yield will be higher than the nominal yield
II The current yield will be lower than the nominal yield
III The dollar price of the bond will be at a premium to par
IV The dollar price of the bond will be at a discount to par
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
The bond was issued with a coupon of 10%. Currently, yield for a similar issue is 12%. Therefore, interest rates have risen subsequent to the issuance of the bond or the credit quality of the bond has deteriorated. When interest rates rise, yields on bonds already trading must also rise. What causes this is a drop in the dollar price of the issue - the bond now trades at a discount.
Which of the following procedures are required to open a Portfolio Margin account?
I The account must be approved by the designated ROP for uncovered options writing
II The customer must receive a copy of the risk disclosure document, at or prior to, account opening
III The customer must sign an acknowledgment that he or she has read and understands the risk disclosure document
IV The account must be approved by the CBOE or FINRA for exemption from Regulation T margin requirements
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is C.
FINRA requires that a portfolio margin account be opened as an options account that is qualified for naked options writing. This requires a more-detailed suitability determination and requires not only branch manager approval, but also separate approval of the designated Registered Options Principal (this is the “main office” ROP in charge of compliance as opposed to a regular branch manager-ROP). The customer must be provided with a portfolio margin risk disclosure document at, or prior to, the initial transaction in the account and must sign an acknowledgment that he or she has read and understands the disclosure document prior to the initial transaction in the account. There is no requirement for the member firm to get each customer account approved by the CBOE or FINRA.
A registered representative writes a letter to be sent as a general mailing to prospective customers, that recommends the purchase of a specific mutual fund. Which statements are TRUE?
I Each letter must include a copy of the fund prospectus
II The letter must be approved in advance by the principal
III The prospectus must be approved in advance by the principal
A. I only
B. I and II only
C. II and III only
D. I, II, III
The best answer is B.
Prospectuses are required for any “offer” of a new issue that is not exempt from the provisions of the Securities Act of 1933. Every mutual fund share that is sold is “newly issued” by that fund, therefore mutual funds must be offered with a prospectus. A letter to customers that recommends the purchase of a mutual fund constitutes an “offer” of a new issue under the Securities Act of 1933. Any offer must be accompanied with, or preceded by, a prospectus. The prospectus need not be approved by the principal, since it is lawyer prepared and has been filed with the SEC; however, the solicitation letter to customers must be approved in advance by the principal.
A customer account holds the following:
20% U.S. Stock Fund
20% International Stock Fund
40% Emerging Markets Stock Fund
20% Investment Grade Corporate Bonds
This portfolio is MOST susceptible to:
A. market risk
B. political risk
C. credit risk
D. liquidity risk
The best answer is B.
This portfolio is concentrated in Emerging Markets stocks (40% of the portfolio). These are stocks in fast-growing “Third World” countries that do not have strong political systems and legal protections. Say, for example, that the fund holds stocks of companies based in Pakistan, the government is overthrown, and the new government nationalizes the companies that are owned by the fund, giving no compensation to the ex-shareholders, so they lose their investment. This is called “political risk.”
All of the following are coincident economic indicators EXCEPT:
A. Personal Income
B. Employment Duration
C. Employment Levels
D. Industrial Production
The best answer is B.
Coincident indicators include personal income levels, employment levels and the index of industrial production. These all show how the economy is performing at the current time. Employment duration is a lagging indicator - it shows how long someone was employed before losing their job - so it shows past history.
A customer buys $10,000 of 30 year corporate bonds with 10 years left to maturity at 92. The customer elects not to accrete the discount annually. At maturity, the customer will have:
A. no capital gain or loss
B. an $800 taxable capital gain
C. $800 of taxable interest income
D. a $9,200 taxable capital gain
The best answer is C.
Corporate bonds bought in the secondary market at a discount are termed “market discount bonds.” There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond’s life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).
A registered representative wishes to give a speech about investments in growth stocks versus value stocks to a group of 50 retail attendees. Which of the following statements are TRUE regarding the speech?
I The speech must be approved in writing by a compliance officer or principal
II The speech should be informational, not promotional in nature
III The speech can contain comparisons of past performance of recommended investments to that of recognized market indices
IV A written copy of the speech must be retained by the member firm for 3 years
A. I and II only
B. III and IV only
C. I, II, and IV
D. I, II, III, IV
The best answer is D.
FINRA defines communications with the public as either:
- Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
- Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to “post use review and approval” (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A “Retail Communication” is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
- Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
- Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
Since this speech is being given to 50 retail attendees, it falls under the “Retail Communication” definition and requires prior principal approval. There is no prohibition on comparing performance to that of a recognized benchmark, such as the Standard and Poor’s 500 Average - this is the industry norm. What is not permitted is a projection or promise of future performance. All speeches are supposed to be informational, not promotional, in nature.
Interest income from all of the following municipal issues would likely be included as a tax preference item in the Alternative Minimum Tax computation EXCEPT:
A. Private Purpose Bonds
B. School District Bonds
C. Industrial Revenue Bonds
D. Redevelopment Bonds
The best answer is B.
The interest income from non-essential private use municipal bond issues is included as a “tax preference” item in the Alternative Minimum Tax. Both School District Bonds and Public Housing bonds are considered to be “essential public uses” and are not subject to AMT. Industrial Revenue Bond issues are used to finance construction of plants for corporate lessors and are “private use.” Redevelopment bond issues are used to finance rehabilitation of plant and offices, typically for corporate use, and also are considered to be “private purpose.”
A customer buys 100 shares of XYZ stock at $36 and buys 1 XYZ Jan 35 Put @ $6 on the same day. For tax purposes, what is the cost basis of the stock?
A. $30
B. $36
C. $41
D. $42
The best answer is D.
When a put is purchased on a stock on the same day that the stock is bought, the put is said to be “married” to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a “married” put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock’s cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $36 + $6 premium = $42 per share. When the stock is sold the customer reports a capital gain or loss based on the sale price of the stock.
