vocab 4 Flashcards
May a firm conduct its annual compliance meeting via webcast?
Yes, provided participants have the ability to have questions answered on a timely basis.
Whose Social Security number is listed on a custodial account? (UTGM)
The minor’s
Hank is a 71-year-old who has a Roth IRA. What penalty is assessed if Hank has failed to begin taking distributions?
There is no penalty, since Roth IRAs do not have RMDs.
May an 85-year-old continue to contribute to a Roth IRA?
Yes, provided she has earned income.
What is the maximum annual IRA contribution for a 58-year-old who only has investment income?
$0, since he has no earned income
How much may a married couple earning $325,000 contribute to a Roth IRA?
$0, since the couple’s income exceeds the income threshold
What is the typical cost basis for a participant in a qualified retirement plan?
$0, since these plans are typically funded pre-tax.
Distributions from a qualified plan are taxed at __________________ rates.
at ordinary income
May clients invest in an out-of-state 529 plan?
Yes. Clients may choose to invest either in-state or out-of-state.
In an non-qualified annuity, how is a single distribution taxed?
Earnings first (LIFO)
What technique can be used to roll assets from one annuity into another without taxation?
A 1035 Exchange
Is switching between annuity sub-accounts taxable?
No
In a non-qualified annuity, how is a return of capital taxed?
Tax-free, since it is part of the client’s basis
What is the SEC-mandated period for advertising the yield of a money market fund?
7 days
What is the SEC-mandated period for advertising the yield of a bond fund?
30 days
For how long must mutual fund advertisements be kept on file?
Three years (but easily accessible for the first 2 years)
Must a photocopied magazine article on mutual fund investing be filed with FINRA?
No. Independently prepared reprints need not be filed, but must be approved by a principal.
May an aunt set up a 529 plan for her niece?
Yes. The donor is not required to be a parent.
True or False: Unrealized gains in a mutual fund are taxable.
False. Unrealized gains (paper profits) are not taxable.
May a person contribute to her own 529 plan?
Yes
Are variable life policies subject to IRS early withdrawal penalties?
No, but variable annuities would be subject to the penalty.
John turns age 70 1/2 in December. When must he begin the RMD from his IRA?
April 1 of the following year
Who disburses checks for capital gains distributions to mutual fund shareholders?
The transfer agent, who is typically the paying agent as well
What is waived for a first-time homebuyer in the event of an IRA distribution?
The penalty is waived, however, taxes are still levied.
May a firm advertise a hedge fund being offered through a Reg. D private placement to the general public?
No. This is prohibited.
Is there an income threshold for 529 College Savings Plan contributors?
No. There are no income limits imposed for these plans.
May a Series 6 registered person engage in option trades?
No
Which federal law created the SEC?
The Securities Exchange Act of 1934
Which federal law governs the registration of RRs and their firms?
The Securities Exchange Act of 1934
Which federal law governs the registration of new issues?
The Securities Act of 1933
Are CMOs exempt from registration under the Securities Act of 1933?
No. CMOs are corporate securities that must be registered.
What may an RR say upon passing her Series 6 exam?
She may state that she is registered with FINRA. Remember that registration does not imply expertise.
True or False: Interest and dividends are considered earned income.
False. They are considered unearned income. Wages, salary, and tips are earned income.
Is default possible on a municipal offering?
Yes. Only U.S. Government issues are considered free of default risk.
What is a specific risk that may be attributed to a GNMA fund?
Prepayment risk. This is the risk that mortgages may be paid off early.
What is Subchapter M?
A section of the IRS Code that defines regulated investment companies (conduit/pipeline theory).
The ___________ bears the investment risk in a defined benefit plan.
employer
The ___________ bears the investment risk in a defined contribution plan.
employee
The new issue market is also known as the __________ market.
primary
What is the tax implication of a person-to-person gift of $100,000?
Tax-free to the recipient, but any amount in excess of $13,000 per year is taxable to the donor
What is the tax implication of a policy loan on a life insurance policy?
The loan is not taxed, but interest is charged on the outstanding balance.
What is the tax implication of the death benefit on a variable annuity?
Any amount above the contract’s basis is taxable to the beneficiary.
May an RR disclose Series 6 examination content to his supervisor?
No. Disclosure of exam content may invalidate the result.
A mutual fund shareholder’s tax liability is reported on Form _______.
1099.
What is the maximum annual tax loss that may used against ordinary income?
$3,000. Any remaining balance must be carried forward.
Bill has unrealized losses of $10,000. How much may he claim in the current tax year?
Zero. Unrealized losses do not count for tax purposes.
Is the death benefit of an annuity included in the estate of a deceased client?
Yes. Additionally, any amount over the cost basis may be taxable to the beneficiary.
Are loans taken against variable life insurance policies taxable?
No, but the policyholder is charged interest on the loan.
If a spouse dies, what can be done with his IRA assets?
The assets may be combined with those of the surviving spouse.
Who funds a 529 plan?
The donor
Who is eligible to contribute to a 403(b) plan?
Public school teachers. Military academy instructors are not eligible.
Name the four categories of professionals that would not be considered investment advisers?
Lawyers, accountants, teachers, and engineers provided the advice given is incidental to their profession. (Remember L, A, T, E)
When withdrawing from a qualified plan, how is the distribution taxed?
The entire withdrawal is taxed, since these plans are normally funded pre-tax and have a zero cost basis.
What is included in the cost basis of a mutual fund client?
Original investment + reinvested dividends and capital gains
Who can charge a client for securities-related advice?
Only registered investment advisers. Remember, BDs charge a commission for executing trades, not for advice.
A client bought stock at $20 which has appreciated to $25. If the stock is gifted, what is the recipient’s cost basis?
$20. The cost basis on a gift is the lower of the purchase price or the current value.
If an RR receives information about a new company from someone in the research department of his BD, what must be done?
The RR must report the analyst’s disclosure to his manager. This could be a case of insider trading.
How may a client avoid the 10% tax penalty on premature distributions from an IRA?
The client may begin to receive a series of identical distributions (often called annuitizing an IRA).
For a mutual fund to issue shares publicly, what is the minimum net worth requirement?
$100,000
Under which federal law are firms, RRs, and exchanges registered?
The Securities and Exchange Act of 1934
True or False: Zero coupon bonds would be a suitable recommendation for college funding.
True, especially since clients may want to avoid stock market risk.
Who is subject to The Insider Trading Act?
Anyone who misuses material non-public information
True or False: Contributions made to qualified retirement plans are tax-deductible.
True
What is the tax treatment of the distributions made by qualified retirement plans?
They are entirely taxed at ordinary income rates, since these plans have a zero cost basis.
True or False: Contributions made to non-qualified retirement plans are tax-deductible.
False. The contributions are non-deductible.
True or False: Earnings generated in a non-qualified retirement plan are tax-deferred
True
What is the tax treatment of distributions made by non-qualified retirement plans?
Since contributions are made after-tax, only the earnings portion is taxable at ordinary income rates.
How are income distributions from a bond mutual fund taxed?
At ordinary income rates
What are some of the possibilities for avoiding premature distribution penalties in IRAs?
Death or disability of the owner, education expenses, first-time home buyer, or annuitization of distributions
457 plans are used by ________ government employers.
local
Are life insurance death benefits taxable?
No. Death benefits are received tax-free.
What is the maximum annual contribution to a 401(k)?
$17,000
What is the maximum annual contribution to a 403(b)?
$17,000
What is the maximum annual contribution to a 457?
$17,000
May an RR and a client share in an account?
Yes, with firm approval and provided the sharing in gains and losses is proportionate to their investment.
If a client refuses to provide certain information, may the account still be opened?
Yes, although name and address are required
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
The New Issue Rule covers what new issues?
All equity IPOs
True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.
False. They are considered restricted.
Besides BDs and their employees, who else is restricted from purchasing equity IPOs?
An employee’s immediate family if materially supported by, or sharing household with, the employee
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
Define correspondence.
Written/electronic communication sent to existing clients and/or less than 25 prospective clients within a 30-day period
The Telephone Consumer Protection Act (TCPA), allows calls from ________ to ________ local time of the called party.
8:00 a.m. to 9:00 p.m
Investment companies must send financial statements to customers every ____ months.
6
What amount of an investment company’s Board of Directors must be independent/unaffiliated?
A majority
What are the three different types of investment companies?
1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies
True or False: Mutual fund shares may be purchased and sold in the secondary market.
False. Mutual funds are always considered new issues and are bought and sold through the fund.
Mutual fund shares have loan value after they have been owned for ____ days.
30
What terms are synonymous with a mutual fund’s Net Asset Value (NAV)?
Bid price or Redemption price
What price is paid for closed-end management company shares?
Market price plus a commission
Are breakpoints available when investing in UITs?
Yes
True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.
True
What are some of the alternative names for a fund’s underwriter?
The sponsor, distributor or wholesaler
Which federal law created the NASD?
The Maloney Act of 1938
