Test Improve Flashcards
Customer wants to open new account but refuses to provide suitability info. Under FINRA rules can you open the account?
Yes, you can open the account buy reccomendations must be limited to suitablity info the firm has on the customer. Doesn’t happen much in real world
When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period?
None
Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations.
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client?
Ordinary income taxation on the earnings withdrawn until reaching the owner’s cost basis
A new municipal bond issue had a dated date of January 1, 2018. The first coupon was due on August 1, 2018. The customer bought for settlement on September 1, 2018. How many months of accrued interest must he pay at settlement?
One month
On a new bond issue, the issuer sets the dated date. That is the date from which interest first begins to accrue. It is not unusual for the first interest payment date to be more than six months from the dated date. That is known as a long coupon (longer than six months). Therefore, on August 1, 2018, seven months of interest was paid (January through the end of July). The customer did not purchase the bond until late August and owes interest only from the August 1, 2018, coupon payment date up to, but not including, the September 1 settlement date (one month).
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $25,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is
$8,750
Account holder 58 y/o so extra 10% tax penalty
Only the deferred growth is taxable on a LIFO (last-in, first-out) basis. In this case, it is the amount of the withdrawal in excess of the cost of $25,000. Using LIFO, all of the withdrawal is part of the $47,000 in earnings that have been generated. That $25,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is under 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $25,000. Remember, all annuities are nonqualified unless stated otherwise in the question.
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?
$75
Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has “bought back” the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, “On September 15, he purchased 25 shares of KLP stock.” That washes out $25 of the loss, but the rest is okay.
Using a Rule 415 shelf registration, an issuer registered 40 million shares of common stock with the SEC. How long is the registration effective for?
Two years, unless the issuer qualifies as a well-known seasoned issuer (WKSI), where it is three years.
There is no need to file a new registration with the Securities and Exchange Commission if the issuer meets the two- or three-year requirement, whichever applies. Beyond these times, a new registration statement would be necessary.
T/F: Contributions to 529 plans are made with pretax dollars at the federal level
False
Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.
When a customer moves accounts from one BD to another, is it the carrying firm or the receiving firm that sends the transfer initian form (TIF) to ACATS?
The recieving firm sends the TIF to ACATS
Interest on direct debt from US gov is taxable at what level(s) (fed, state, local)?
Interest on direct debt (T-bills, T-notes, T-bonds, and STRIPS) is taxable by the federal government but not by state or local governments.
Can levereged ETFs be bought on margin?
Yes
They can be purchased on margin just like regular ETFs.
T/F: Interest begins to accrue on the last interest payment date and runs up to, but not including, the settlement date
True
Interest doesn’t include the settlement date
Mutual funds must show performance statistics for _______ (what time periods)
one, five, and 10 years, or for the life of the fund—whichever is shorter
Mutual fund performance statistics must show results for one, five, and 10 years, or for the life of the fund—whichever is shorter.
Would default risk benefit form portfolio diversification?
Yes
Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk
Does diversification work best with systematic or non-systematic risk?
Non systematic risk
Diversification works best with nonsystematic (unsystematic) risks.
Last week, your customer’s margin account showed SMA of $5,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $45,000. What is the client’s current SMA and buying power?
SMA of $0.00 and buynig power of $0.00
Did you catch the trick here? During the past week, the long market value has dropped to the point where this client is subject to a maintenance call. With only $5,000 of equity ($50,000 minus $45,000) and LMV of $50,000, the equity is only 10% of the LMV, well below the 25% minimum. When a margin account goes below the minimum maintenance level, the SMA is wiped out. This is the only exception to the “use it or lose it” rule
An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions?
Never with a nonqualified annuity
On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.
On the exam, unless stated otherwise you can assume every annuity is _____ (qualified or nonqualified)
Nonqualified
You can assume every annuity is nonqualified unless stated otherwise
(No RMDs for non qualified annuities)
Would an agent comitting the following action be comitting a violation:
Selling securities from a minor’s custodial account without the custodian’s consent but with the beneficial owner’s consent
Yes, would be a violation
The custodian—not the beneficial owner (minor)—is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.
Woud an agent comitting the following action be comitting a violation:
Buying securities in a joint account at the request of one party only
No
That’s okay
You can buy in a joint account at the request of just one party
If a revenue bond has a net revenue pledge, that means debt service payments (interest and principal) are paid second in line after _______
After operating and mainenance expenses are paid first
When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year’s principal). In a gross revenue pledge, the order is reversed.
Account has $50k long market value and $45k debit balance. What’s the equity?
$5k equity
Equity = LMV - DB
RMDs for non qualified annuities
None
Are not RMDs for non qualified annuities (unless stated otherwise)
A customer must recieve a current options disclosure document at or before the time of ____
Account approval
Must recieve ODD at or before the time account gets approcal for options trading
T/F: The options disclosure document must be recieved at or before the time of account approval, but the options AGREEMENT doesn’t have to be SIGNED and RETURNED until 15 days after account approval
True
> ODD, at or before account aproval
Options AGREEMENT, signed and returned within 15 days of account approval
Does 5% markup policy apply to primary market transactions?
No
Only secondary market
“The 5% markup policy applies to secondary market transactions in nonexempt securities.”
The ABC Insurance Company is advertising its variable annuity product as “ABC Lifetime Income—income generated from mutual fund returns.” This advertisement is
A)
prohibited because it implies returns from mutual funds.
B)
permitted as long as there’s no guarantee.
C)
prohibited because it doesn’t reference an annuity.
D)
permitted.
A) prohibited
Explanation
Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as “annuity.”
A syndicate member in a municipal underwriting wishes to place an order with the manager for its own portfolio. Under Municipal Securities Rulemaking Board rules, an order for a related portfolio must be
A) entered as a designated order. B) disclosed to the manager. C) entered as a group order. D) entered as a presale order.
B) disclosed to manager
Disclosure is necessary to allocate orders. An order for a related portfolio will be accorded member status—the lowest priority.
