Unit 2 (2 Of 3)

Front 1

When are mutual funds redeemed?

Back 1

1) Within 7 days at NAV

2) 7 days can be suspended if

a) NYSE closed other than holiday, weekend,

or emergency

b) SEC grants permission

Front 2

Who are the five parties that work together to make an investment company operate?

Back 2

1) Board of directors
2) The Investment Advisor
3) The Custodian
4) The Transfer Agent
5) The Underwriter

Front 3

What should investors look at when comparing funds with similar objectives?

Back 3

1) Past performance (1, 5, & 10 years)

2) Costs of investing (Sales load & Expense Ratio)

3) Taxation

4) Portfolio turnover

5) Services offered

6) Tenure and track record of fund manager

Front 4

What are the methods for marketing its shares to the public?

Back 4

1) Sales to the public at POP

2) Fund to Underwriter to Dealer to Investor

3) Fund to Underwriter to Investor

4) Fund to Investor

Front 5

What are the share classes?

Back 5

1) Class A Shares (front-end load)

2) Class B Shares (back-end load)

3) Class C Shares (level load)

4) No load

Front 6

What are the class A shares?

Back 6

1) Breakpoints can reduce sales chg for volume

2) Combination privilege may be available

3) Letter of intent (13 months & backup date up

to 90 days)

4) Suitable for large volume, long-term

investment)

Front 7

What are the class B shares?

Back 7

1) Contingent deferred sales charge (CDSC)

2) Must be disclosed on confirmation

3) Higher expense ratio than Class A

4) Converts to Class A after CDSC expires

5) Suitable for low volume, long-term investment

Front 8

What are the class C shares?

Back 8

1) Sales charge deducted each quarter

2) Maximum 0.75% per year

Front 9

What is the No load share?

Back 9

Can advertise as no-load if 12b-1 is 0.25% or less

Front 10

What is a breakpoint?

Back 10

A breakpoint is the schedule of sales charge discounts that a mutual fund offers for lump sum or cumulative investments.

Front 11

What are the rights of accumulation?

Back 11

A scale of reducing sales charges in which the sales charge applicable to the securities being purchased is based upon the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased.

Front 12

What is the max sales charge?

Back 12

The max sales chg is 8.5% if breakpoint or rights of accumulation are offered. If not offered, the max sales charge is 6.25%.

Front 13

What shares are most suitable for a large amount to invest and a long-time horizon?

Back 13

Class A shares

Front 14

What does FINRA define as a customer?

Back 14

Anyone who is not a member of FINRA

Front 15

Who is unable to receive discounts?

Back 15

Nonmembers, suspended members, or public. There is an exception for foreign firms.

Front 16

When should firms transmit customer payments to the mutual fund or its agent?

Back 16

Within 3 business days of trade date or within 1 business day of receipt, whichever is later

Front 17

What is an exchange privilege also known as a fund complex?

Back 17

Allows an investor to convert an investment in one fund into an equal investment in another fund in the same family without incurring an additional sales charge

Front 18

Is an exchange of funds considered a sale?

Back 18

Yes, followed by a purchase for tax purposes. Any gain or loss is fully reportable in the year of exchange.

Front 19

Under the exchange privilege, what rules apply when mutual funds are purchased at NAV?

Back 19

1) The purchase may not exceed the proceeds gathered by the redemption of the other fund

2) The redemption may not involve a refund of sales charges

3) The exchange must take place w/in 30 days after the redemption

4) The sales personnel and dealers must receive no compensation of any kind from the reinvestment

Front 20

What are mutual fund accumulation plans?

Back 20

Allows investors to use the dollar cost averaging strategy. The types are voluntary accumulation plans and lump-sum accounts.

Front 21

What are voluntary accumulation plans?

Back 21

Allows a customer to deposit regular periodic investments on a voluntary basis.

Front 22

What are lump-sum accounts?

Back 22

Also known as regular accounts; investor buys shares in the fund by depositing the entire amount he intends to invest all at once.

Front 23

What are periodic payment plans?

Back 23

Contractual plans are no longer sold, but were purchased from unit investment trusts (UITs), could offer 9% sales charge over the life of the plan.

Front 24

What is the difference between the plan sales chg for 1940 Act vs. 1970 Act?

Back 24

1940 Act (front-end load) - 9% max sales chg, 50% sales chg collected in first year, the max sales chg over 4 years not defined but can't exceed 9%

1970 Act (spread load) - 9% max sales chg, 20% of any given payment, 16% average over the first 4 years.

Front 25

What is dollar cost averaging?

Back 25

A person invests regular amounts over time. Allows a person to buy more shares when prices are low and fewer shares when prices are high. Does not guarantee profits in a declining market.

Front 26

What happens in a fluctuating market?

Back 26

The average cost per share will be lower than the average price per transaction of the shares. However, dollar cost averaging does not guarantee profits in a declining market.

Front 27

What are withdrawal plans?

Back 27

Free service where customer invests a minimum amount to set up a w/d plan. The different types are fixed dollar, fixed percentage or fixed share, or fixed time. Discourage people from investing more money once the withdrawals begin.

Front 28

What is a fixed dollar w/d plan?

Back 28

A periodic request to w/d a fixed dollar amount. The fund liquidates enough shares each period to send that sum. May be more than the earnings during the period, so it's no long how long the money will last.

Front 29

What is a fixed percentage aka fixed share w/d plan?

Back 29

A fixed number of shares or fixed percentage of the original number of shares is liquidated each period.

Front 30

What is a fixed time w/d plan?

Back 30

Customers liquidate their holdings over a fixed period of time. The money varies each period.

Front 31

What are withdrawal plan disclosures?

Back 31

Registered rep must:

1) never promise an investor a guaranteed rate of return

2) stress to the investor that it is possible to exhaust the acct by over w/d

3) state that during a down market, it is possible that the account will be exhausted if the investor w/d's even a small amount;

4) never use charts or tables unless the SEC specifically clears their use

Front 32

What are annuity plans?

Back 32

A contract issued by an insurance company that can provide a lifetime income.

Front 33

What are the different types of annuities?

Back 33

1) Fixed

2) Variable

3) Combination

4) Index

Front 34

What is a non-qualified annuity?

Back 34

They are funded with after-tax dollars, the money grows tax-deferred, and only the earnings are taxed at distribution.

Front 35

What is a fixed annuity?

Back 35

1) Guarantees its rate of return

2) Considered an insurance product, not security

3) Payout determined by account's value & annuitant's life expectancy (based on mortality rates)

4) Constant payment throughout the annuitant's life

5) Only need life insurance license to sell product

6) No risk to P&I, but loss of purchasing power is at risk b/c of inflation

7) Premiums invested in insurance companies general account

Front 36

What is a variable annuity?

Back 36

1) Introduced to keep pace with inflation

2) Investor assumes the investment risk rather than the insurance co

3) Product considered a security and must be sold w/ two prospectus

5) Requires an individual be licensed to sell ins & securities

6) Premium payments invested in the separate acct of the insurer

7) Returns in the separate acct are not guaranteed

8) Annuitants can choose a guaranteed monthly income, but income received is dependent on separate acct performance

Front 37

What is a combination annuity?

Back 37

Provides a minimum guaranteed payment plus payments that keep pace with inflation. An investor contributes to both a fixed (general) and variable (separate) account.

Front 38

What is an index annuity?

Back 38

An annuity with no market or purchasing power risk. The credit goes into the owner's account using a formula based on the performance of a particular stock index. The credit depends on the percentage rate tied to the growth of the index.

Front 39

What is the amendment to FINRA Rule 2320 (Variable Contracts Rule)?

Back 39

There is no maximum sales charge when purchasing a variable annuity. The SEC states the sales charge must be reasonable.

Front 40

What are accumulation units?

Back 40

An investor's share of ownership in the separate account. Prior to contract being annuitized.

Front 41

What is mortality guarantee?

Back 41

When annuitants live longer than expected. Payments continue for as long as they live and insurance companies assume the increased mortality costs.

Front 42

What is operating expense guarantee?

Back 42

When the company pays the difference when actual operation costs increase. Companies set a ceiling for expenses charged to the separate account.

Front 43

What is a deferred annuity?

Back 43

An annuity purchased with a single payment w/ payment benefits deferred until the annuitant elects to receive them. The annuitant acquires accumulation units.

OR

A period payment that allows investors to make periodic payments over time. Contract holder can invest on a monthly, quarterly, or annual basis. Annuitant acquires accumulation units.

Front 44

What is an immediate annuity?

Back 44

An annuity purchased with a single payment and the insurance company begins to pay out benefits within 60 days. The annuitant acquires annuity units.

Front 45

What is the accumulation stage?

Back 45

The pay-in period when the contract terms are flexible. Contract can be terminated at any time during this stage.

Front 46

What are annuity units?

Back 46

Accumulation units convert to annuity units once a contract is annuitized. An accounting measure that determines the amount of each payment to the annuitant and is used only during an annuitized contract's payout period.

Front 47

How do you determine the number of annuity units credited to an annuitant's account?

Back 47

Actual determination of payout based on: money in the account, age of annuitant, sex of annuitant (women live longer), settlement option chosen, and assumed interest rate (AIR)

Front 48

What is an assumed interest rate (AIR)?

Back 48

Used for projecting earnings for a variable annuity

Front 49

What method does lump sum or random withdrawals use?

Back 49

LIFO (last-in first-out) Earnings are considered taken before cost basis. Distributions made before 59 1/2 are subject to a 10% penalty. The earnings are taxed as ordinary income. Then, cost-base tax and penalty free.

Front 50

What happens if an annuity holder dies during the accumulation stage?

Back 50

The beneficiary will receive either the total value of the account or the original investment amount (whichever is greater). Taxed at ordinary income rates on excess over cost base.

Front 51

What is the cost basis of annuitized payments for a nonqualified annuity?

Back 51

Contract's initial value / the # of years of life expectancy = produces an exclusion ratio (a portion of each payment that is nontaxable)

Front 52

How do you compute ordinary income taxes?

Back 52

cost basis / expected return

Front 53

What is the cost basis?

Back 53

The money invested in an annuity that is not taxable, nor subject to penalties upon distribution.