Unit 4 (2 Of 2)

Front 1

What must product communications for variable life or annuity describe?

Back 1

The product as either a variable life or annuity. Proprietary names may be used in addition to these descriptions. There may be no implication that the product being offered or its underlying account is a mutual fund.

Front 2

When is it appropriate to use illustration of a fund's performance?

Back 2

When no significant changes occurred to the fund at the time or after it became a part of the variable product.

Front 3

What is included in hypothetical illustrations?

Back 3

1) May not be used to predict investment results

2) May use any combination of assumed investment returns up to and including a gross rate of 12%, provided that one of the returns is a 0% gross rate.

3) Must reflect the maximum mortality & expense charges associated w/ the policy for each assumed rate

4) Variable life insurance product performance may not be compared with other investment products. Can be compared to term insurance.

Front 4

When is hypothetical illustrations of potential performance permitted?

Back 4

Only with variable life insurance policies and only if compliance w/ the rules.

Front 5

What is a life settlement?

Back 5

Selling a life insurance policy or the right to receive the death benefit to an entity other than the insurance company that issued the policy in a transaction.

Front 6

What happens if one source has exclusive arrangements to market all of a firm's life settlement policies?

Back 6

It is a violation and should be marketed to multiple sources to ensure a fair price for their policies.

Front 7

What form is needed if a member wants to begin selling variable life insurance?

Back 7

File a Continuing Membership application and receive approval of this change in business operations

Front 8

What are the suitability issues that are associated with life settlements?

Back 8

1) Comparison of tax treatment of the cash payment to the tax treatment of the death benefit

2) Recognizing that the completion of the transaction takes significantly longer than other securities transactions

3) Aware of the privacy issues because the seller provides complete medical history & personal info

4) Replacing this insurance is done at a higher cost

Front 9

With life settlements, when will particular vulnerability arise?

Back 9

1) Prospect is under financial pressure because retirement assets have decreased in value

2) Prospect is concerned about current cash needs

3) Interest income from fixed assets has decreased

4) Prospect is concerned about current or future medical expenses or long-term care

Front 10

What should commission charges be based on?

Back 10

The gross offer made to the seller, not the face value of the policy.

Front 11

What is the measuring stick for commission?

Back 11

5%, but it can rise above that and be justified

Front 12

What is the Telephone Consumer Protection Act of 1991 (TCPA)?

Back 12

Enacted to protect consumers from unwanted telephone solicitations. Administered by the Federal Communications Commission (FCC).

Front 13

What does the Telephone Consumer Protection Act require organization that perform telemarketing calls to do?

Back 13

1) Maintain a do-not-call list (remain for 5 years)

2) Institute a written policy on maintenance procedures for the list

3) Train RRs in using the list

4) Ensure RRs acknowledge & immediately records the names & telephone numbers of customers who asked not to be called again

5) Anyone doing cold call from the firm informs customer of firm's name and address

6) Telephone solicitation calls occur between 8-9 of customer's time zone

7) Ensure Nat'l call list being used is not more than 31 days old

Front 14

What are the exemptions for the Telephone Consumer Protection Act?

Back 14

1) Calls made to parties with whom the caller has an established business relationship or parties who have been asked to call

2) Made on behalf of a tax-exempt nonprofit org.

3) Not made for a commercial purpose

4) Made for legitimate debt collection purpose

Front 15

What is hypothecation?

Back 15

When a customer purchases securities on margin and the securities are pledged to a bank as collateral for the loan. Customer must agree to the pledge in writing and must place the securities in a street name.

Front 16

What is the rule for commingling of customer securities (SEC Rule 15c2-1)?

Back 16

Prohibits a broker/dealer from commingling one customer's securities w/ another customer's securities as joint collateral for a bank loan unless the customer specifically gives written authorization. Customer securities can never be commingled with B/D securities or pledged jointly as collateral for a bank loan.

Front 17

Why should B/D's not commingle their securities with customers?

Back 17

Because if the B/D defaults on its portion of the loan, a cross lien would be created on the customer's securities.

Front 18

What must registered persons who wish to borrow from or lend money to customer provide?

Back 18

Prior written notice of the proposed arrangement to the firm, and the firm must approve the arrangement in writing.

Front 19

What are the five types of lending arrangements that FINRA rules permit?

Back 19

1) immediate family relationship between the RR and the customer

2) The customer is a financial institution regularly engaged in the business of providing credit, financing, or loans

3) the customer is acting in the course of such business

4) cust & RR are both registered persons w/ the same firm

5) cust & RR have a personal or business relationship outside of the broker-customer relationship

Front 20

What does the term immediate family include when it comes to borrowing and lending?

Back 20

Parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and also includes any other person whom the registered person supports, directly or indirectly, to a material extent.

Front 21

When is an exception made for RR to share in profits or losses in a customer's account?

Back 21

It is prohibited unless:

1) profit or loss is shared in proportion to the capital contributed by each party

2) the arrangement is approved in writing by a principal and all of the customers involved in the account

Front 22

What provisions must be listed in a written sales agreement between an issuer of investment company securities and the B/D participating in the distribution of new securities?

Back 22

1) Set forth selling concessions the B/D will receive, along w/ a complete description and schedule of available documents, as well as qualification requirements

2) Stipulate that all parties involved in the transaction will abide by the Investment Company Act of 1940

Front 23

What are the restrictions to the sales agreement?

Back 23

1) No member party to a sales agreement may purchase an open-end investment security at a price lower than the bid next price quoted by the issuer - no discounts at NAV

2) No member that is a principal underwriter for an open-end investment comp. security may repurchase the security from a dealer that isn't a party to the sales agreement w/ the underwriter

Front 24

What provisions are intended to prevent any party from profiting from reneged trades?

Back 24

1) Sales agreement must contain a provision that if any security is repurchased by the issuer or UW for the issuer's account OR if any security is tendered for redemption w/in 7 business days after the initial transaction date, the dealer or broker will refund to the UW the full concession allowed to the dealer or broker on the original sale.

2) The sales agreement must stipulate that if the principal UW made the original sale directly to the investor, the principal UW must forfeit the sales charge.

Front 25

What are the rules for participation in underwriting?

Back 25

A member cannot enter into a joint account, and underwriting syndicate, or a selling group w/ any nonmember broker/dealer or with any member of a national securities exchange that is not also a member of FINRA for the purpose of acquiring and distributing an issue of nonexempt securities OR

Members may not join w/ nonmembers in a group contemplating the distribution to the public of any issue of nonexempt securities OR

A suspended B/D cannot participate in the underwriting of securities.

Front 26

What is the rule when a member is selling to a bank or trust?

Back 26

When participating in the distribution of an issue of securities as an underwriter or in a selling group, the member may not allow any selling concession, discount, or other allowance in connection w/ the sale of the securities.

Front 27

Who can a member grant selling concessions, allowances, or discounts to?

Back 27

Only other members that are parties to a written sales agreement.

Front 28

How does a FINRA member deal with a nonmember broker/dealer?

Back 28

At the same price and for the same fees and commissions as the member deals w/ the general public - at the POP.

Front 29

When must members transmit money received when members engage in the direct retail sales of mutual funds (generally referred to as wire orders)?

Back 29

By regular way settlement (3rd business day after the trade) or by the end of the business day following receipt of the customer's payment, whichever is later.

Front 30

How can a registered open-end company restrict the transferability or negotiability of a security it issues?

Back 30

Only if the restriction is noted in the registration statement and is not in contravention of SEC rules and regulations.

Front 31

What are the interpretations that FINRA's NAC has issued about antireciprocal brokerage rules?

Back 31

1) Pay a salesperson an incentive or add'l comp based on the amount of brokerage commissions received from any investment company

2) recommend specific investment companies to sales personnel or establish recommended, selected, or preferred lists if companies are chosen based on brokerage commissions received or expected

3) grant a salesperson participation in the brokerage commission generated by a portfolio transaction if participation is identified by the sale of shares of the inv. co.

4) use sales of shares of an investment company in negotiating the amount of brokerage commissions to be paid on a portfolio transaction

Front 32

What happens if a member knows that an investment company, investment adviser, or principal UW has a written or oral agreement under which the company directs portfolio securities transactions to a B/D in consideration for the promotion or sale of shares issued by the company or other registered investment company?

Back 32

The member must cease selling shares of or acting as underwriter for that investment company.

Front 33

What does FINRA prohibit with withholding orders?

Back 33

Prohibit members from offering mutual funds at prices based on formulas other than those described in the current prospectus or withholding orders for any mutual funds to profit by such withholding.

Front 34

When may members purchase investment company shares?

Back 34

For investment company purposes only or to cover customer orders

Front 35

When does FINRA allow the sharing of commissions?

Back 35

When the registered rep is registered with the same member (or an affiliate or firm under common control) in a category that would permit receipt of those commissions directly.

Front 36

What does Class A shares offer?

Back 36

Breakpoints, rights of accumulation, letters of intent, and combination privileges. They charge a front-end sales load that may not exceed 8.5% of POP, and most suitable for investors that have a large amount to invest and a long time horizon.

Front 37

When is the sales charge reduced with Class A Shares?

Back 37

It is reduced to 6.25% if an investment company does not offer certain features. To qualify for the maximum 8.5% sales charge, the investment company must provide breakpoints and rights of accumulation.

Front 38

What are breakpoints?

Back 38

The schedule of discounts a mutual fund offers. They area available to any person. The term person for breakpoints include individuals, married couples, parents & their minor children, and corporations.

Front 39

Who does not qualify collectively for breakpoints?

Back 39

Investment clubs or associations formed for the purpose of investing

Front 40

How can an investor qualify for breakpoints?

Back 40

1) lump sum investment

2) Letter of intent

3) rights of accumulation

Front 41

What is a breakpoint sale?

Back 41

Making higher commission by selling investment company shares in a dollar amount just below the point at which the sales charge is reduced