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116 Cards in this Set
- Front
- Back
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What must a sales rep do when recommending a security? |
1) make statements of investment advantages and risks 2) inform the customer they can lose their investment 3) send the customer a prospectus
* They cannot compare the recommended security to dissimilar products |
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What must be shown if a mutual fund communication refers to a mutual fund's ranking? |
1) the length of the ranking period and the ending date. 2) the name of the category in which the fund is being ranked. 3) the name of the ranking entity.
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When a mutual fund selects a broker/dealer to execute trades for its portfolio, it should: |
consider a broker/dealer with sound and reputable qualifications.
*A firm's reputation and qualifications are the only criteria a mutual fund may use when selecting an executing broker/dealer. |
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When must a fund inform its shareholders of their right to reinvest dividends at NAV? |
Annually |
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When is reduced sales charges (breakpoint) allowed? |
1) Lump-sum purchase that qualifies for a breakpoint 2) Additional purchases that qualify for breakpoints under rights of accumulation 3) The customer signing a letter of intent |
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What does a mutual fund's unrealized loss results in what? |
1) Lower NAV per share 2) Reduction in the proceeds payable to shareholders who liquate their shares |
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To qualify for the quantity discount, which are allowed to be joined together under the definition of "any person"? |
1) Husband and wife investing in a joint account 2) Father and son in a UTMA account 3) Trust officer working on behalf of a single trust account
*For the purpose of qualifying for breakpoints, the definition of "any person" includes family units, but only minor children. Adults, other than a husband and wife, are separate persons. |
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Which situations enables the member to receive a discount from the public offering price when there is a sales agreement between a principal underwriter & a member? |
1) It must be in writing 2) It must provide for a refund of the concession by the member to the underwriter if the shares are redeemed within 7 business days of the sale. |
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FINRA rules require that, if a customer redeems mutual fund shares within seven business days of purchase: |
the member firm must forfeit the concession earned. |
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A customer makes an initial purchase of $10,000 of a particular mutual fund and redeems the shares 4 days later. What is true about this statement? |
The broker/dealer must return all concessions to the fund underwriter. |
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What is the rule about sales concessions? |
Sales concessions earned on a mutual fund purchase redeemed within seven days after the purchase must be returned. Therefore, if the sale is made by a broker/dealer, it is returned to the underwriter. If it is a direct sale from the underwriter, it is returned to the fund. The customer will only receive the next computed NAV, not a refund of the sales load. |
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Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? |
1) Receiving cash distributions may reduce Customer A's proportional interest in the fund.
2) Customer B's reinvestments purchase additional shares at NAV rather than at the offering price |
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What does unrealized gains in a mutual fund portfolio do? |
1. Represents the undistributed income and the growth in market value of securities held in the portfolio.
2. Is realized by shareholders only when they redeem their shares. |
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Under which condition does the Investment Company Act of 1940 require a written statement disclosing the source of a dividend payment? |
Whenever all or part of the dividend payment comes from a source other than current income or accumulated undistributed net income. |
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What is eligible for breakpoints? |
A) an investor in an individual retirement account. B) a husband and wife in a joint account. C) a pension plan trustee.
* An investment club is not eligible |
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What does Class A shares of a mutual fund have? |
A front-end load |
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What does Class B shares of a mutual fund have? |
A Back-end load |
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What does Class C shares of a mutual fund have? |
A level load that is an asset-based fee |
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Which of the following mutual fund share classes has no back-end load, low management fees, and low or no 12b-1 fees? |
Class A Shares |
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Your customer has just inherited $5,000. She wishes to invest it for long-term growth and has asked for your recommendation. Which recommendation is least suitable? |
Class A shares of the KPF Long-Term Corporate Bond Fund *A bond fund does not meet the customer's investment objective of long-term growth. This customer's investment of $5,000 will qualify for very few, if any, breakpoints. To avoid a front-end load, she should buy Class B shares, which have no breakpoints, and which eventually convert to Class A shares after some years, losing even their back-end load. Thus, a purchase of Class A shares of a bond fund is the least suitable recommendation. |
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Under the Investment Company Act of 1940, which entities may receive a breakpoint and pay less than the maximum sales charge? |
1. A qualified retirement plan.
2. An insurance company. |
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If a prospectus for a variable life insurance product contains hypothetical projections of returns: |
The maximum return permitted is 12%, and there must be an illustration showing a 0% return as well. |
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What steps must a rep take when making cold calls? |
1) Inform prospects of the firm's name and telephone number or address.
2) Not call prospects who have made a Do-Not-Call request. |
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What items are exempt from the Telephone Consumer Protection Act of 1991? |
1) Nonprofit charitable organizations 2) Calls made to current established business customers 3) Calls without commercial purpose 4) Calls made with express permission from or at the invitation of a customer |
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A prospect receives a telephone solicitation from a registered representative at KPF Brokerage Firm. Under which conditions is this solicitation exempt from the Telephone Consumer Protection Act of 1991? |
1. The individual, who is not a customer, asked the representative to call him. |
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What are the provisions of the FCC's Telephone Consumer Protection Act of 1991? |
1) Do not call lists 2) Time of day restrictions 3) Training requirements
*This is not - A written suitability determination. |
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What is involved in the telemarketing process? |
1) Firms must establish, maintain and use Do-Not-Call lists. 2) Callers must identify themselves and provide information on how to contact the firm. 3) Outgoing cold calls may only be made between 8:00 am and 9:00 pm at the location of the recipient of the call. 4) The caller must identify himself by name and, in addition to disclosing the firm name, must also provide a telephone number or address where the firm may be contacted. |
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What are types of public communications? |
1) Radio advertisement 2) Research report 3) Broker/Dealer websites
*Internal memoranda is not a public communication. It is for internal use only.
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What must be included in a testimonial made on behalf of a member firm and distributed to potential clients? |
1) qualifications of the person giving the testimonial if a specialized or an expert opinion is implied 2) that the returns and investment performance cited in the testimonial may not be duplicated - does not represent the opinions of other customers 3) whether compensation exceeding $100 was paid for the testimonial |
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What is true about recruiting advertising? |
1) It may not contain exaggerated claims about opportunities in the securities business
2) During a firm's first year of business, it must be pre-filed with FINRA |
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Retail communications concerning which of the following must be filed with FINRA within 10 days of first use? |
An established firm's marketing letter for mutual funds |
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Which form of written communication must a principal approve before use? |
Form letters sent to more than 25 retail investors within any 30 calendar-day period must be approved by a principal before use. |
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What must happen to a registered representative's recommendations to a customer? |
Must match the customer's risk tolerance and investment objective. Must be suitable. |
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What must a member firm do when recommending securities to a customer? |
1. Have a suitable basis for recommendations.
2. Disclose or offer to disclose supporting documentation. |
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What are considered violations under FINRA rules? |
Activities designed to manipulate the market in exchange for a direct or indirect payment or to enhance sales of securities to those for whom they may not be suitable are prohibited. Merely placing an advertisement publicizing investment banking services is not an attempt to do either of these. |
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What is classified as retail communication? |
Retail communication is defined as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” Ex. newspaper advertisement, seminar scripts, research reports, telephone directory advertisements, telemarking scripts, electronic communication |
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A new customer comes to you with questions about a growth mutual fund. As a registered representative, what statement can you not make? |
Because this is a growth fund, your shares will increase in value. |
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What must be disclosed when a member makes recommendations in retail communication? |
That the success of a past recommendation does not imply comparable future performance. |
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Which form of public communication must established member firms file ten days before first use? |
Literature incorporating rankings that are not generally published. |
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What must research reports contain? |
1) the name of the firm preparing the material if not the member firm. 2) the date the material was first published. 3) the name of the member firm sponsoring the material.
*the name of the person preparing the material is not needed. |
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What is true about retail communications? |
1) Must be kept for 3 years 2) Must be approved by a principal 3) Claims for service must be reasonable and true
*FINRA reviews some, but not all, retail communication |
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What fits the definition of public communication? |
1) a research report indicating company earnings 2) a form letter sent to more than 25 prospective retail customers in any 30 calendar day period 3) a blind recruitment advertisement
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How soon should mutual fund retail communications be filed by first-year broker/dealers? |
10 business days before use |
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For how many years must a firm keep records on retail communications? |
3 years |
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What material is subject to FINRA's filing requirements? |
Literature describing the performance ranking of an open-end management investment company.
*Prospectus and internal memos need not be filed with FINRA |
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What happens with retail communication filed with another SRO? |
It need not be filed again with FINRA. |
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What must sales literature regarding open-end investment company funds be filed with? |
FINRA w/in 10 business days of first use |
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Who has to approve a broker/dealer's website (advertising)? |
1) Prior written approval by a principal 2) state regulation 3) federal regulation
*SEC approval is not needed |
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What forms are exempt from FINRA's spot-check requirements? |
1) ordinary (summary) prospectus 2) communicating about the member's change of address, name, or telephone number 3) internal memos
*Tombstone prospectus has to be filed w/in 10 business days of first use
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What must first year FINRA member first prefile? |
Retail communication at least 10 business days before use. Excludes institutional sales material or correspondence to customers |
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When should investment company advertisements be filed by established members? |
Within 10 days of first use (postfiling). Pieces that contain ranking prepared by the member or bond volatility ratings must following prefiling requirements. |
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Who is required to file public communication with FINRA if it's prepared by the sponsor? |
The sponsor (underwriter) must ensure that the material is filed with FINRA. The member may use it immediately after receiving it. |
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What must be described in variable life or variable annuity communications? |
It must clearly describe the product as variable life insurance or a variable annuity. |
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When can predated performance illustrations be used? |
Performance that predates a fund's inclusion may be used only if no significant changes occurred to the fund at the time or after it became a part of the variable product. |
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When can hypothetical illustrations be used to demonstrate the performance of variable life policies? |
Hypothetical illustrations must reflect the maximum mortality and expense charges associated with the policy for each assumed rate of return illustrated. In addition, a firm may generally not compare a variable life policy with other investment products, such as mutual funds. |
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What is a ranking entity? |
An entity that provides general information about investment companies and is independent of the investment company and its affiliates. |
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If a ranking category or subcategory has been created by an investment company, what must the retail communications clearly disclose? |
The best and worst performing funds in the category. |
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What is the evaluation a bond mutual fund volatility rating is based on? |
1) Market price volatility of the portfolio 2) Fund's performance |
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What disclosures are required when bond mutual fund volatility ratings are used? |
1) a statement that there is no guarantee the fund will continue to have the same rating or perform in the future as rated. 2) the most current rating. 3) a statement that the portfolio may have changed since the date of the rating. |
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What is allowed with the use of a bond mutual fund volatility rating? |
1) determination of the rating is based exclusively on objective, quantifiable factors. 2) rating and the disclosure statement accompanying it must be clear, concise, and understandable. 3) entity that issued the rating provides disclosure on its rating methodology to investors through a toll-free telephone number, Website, or both. *May not specifically identify or describe volatility
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Under FINRA rules, if an established firm’s retail communication uses a mutual fund ranking comparison, when must it be filed? |
If prepared by the firm, 10 business days prior to use
If prepared by an independent entity, 10 business days after use |
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What is true about variable life communications with the public? |
A member may, but is not required to, use proprietary names in its public communications. A firm, however, may never represent or imply that variable products are mutual funds.
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Under FINRA rules, what is the maximum hypothetical return that may be used in sales literature showing rates of return on variable life insurance products? |
The maximum hypothetical return that may be used is 12%. |
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What is true about the ranking entity? |
It is independent of the investment company.
It provides general information about investment companies to the public. |
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What type of communication would permit the use of mutual fund volatility ratings? |
Sales literature |
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FINRA rules permit open-end investment companies to use rankings in their advertisements as long as certain standards are met. What violates these standards? |
1) Using symbols, such as stars, without explaining what they mean 2) Implying that past performance will be duplicated in the future. 3) A ranking based only on the fund's size.
*Creating your own ranking category is not a violation. |
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What public appearances are subject to the Conduct Rules? |
1) an internet chat room 2) a seminar discussing the products your firm has available for sale 3) a presentation at a high school about mutual funds
*radio advertisement does not count as a public appearance |
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What is a public appearance? |
Public appearances are a form of communication with the public, whether by radio or TV, seminars, speeches, or forums. A presentation given to registered representatives would not come under FINRA rules on communications with the public. |
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What are the three classifications of public communication? |
Institutional (e.g., the strategy letter) Retail (e.g., the IPR sent to 2,500 clients) Correspondence (email sent to 20 prospects) |
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What are the policies with institutional communication? |
1) An entity with $50 million or more in total assets is an institution 2) Does not require the pre-approval of a principal 3) Is not required to be filed with FINRA |
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What is true about testimonials in a public communication? |
If the person giving a testimonial is compensated in excess of $100, this must be stated in the advertisement. It must be clearly stated that the listener's experience may be different from that described in the testimonial. In addition, his qualifications must be given if he is providing technical information or opinions that make it appropriate to do so. |
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Your firm has prepared some institutional sales material on several of the securities it deals in and has provided it to three mutual funds. One of the fund managers calls your firm to ask for some extra copies of the material, because he would like to send it to some of his investor friends. What happens with this request? |
It may not be complied with if your firm wishes to continue to treat the material as institutional sales literature. |
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Which of the following pieces of written material is exempt from routine spot-checking by FINRA? |
Material that makes no claims for a security, but simply states its price or is not intended for the public, is exempt from spot-checking.
Ex. A public communication that simply offers a specific security at a specific price |
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Your firm is doing interviews of the top candidates from among those who responded to a recruiting advertisement. What does advertising rules require? |
Both the job opportunity and the industry itself be represented honestly. |
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Under which circumstances could a member firm make alterations to an article on securities before using it as an independently prepared reprint? |
1. The member firm could alter the presentation format to make it consistent with regulatory standards.
2. The member firm could correct the reported number of shares being offered if the original article stated the number incorrectly. |
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Jeffrey Small, a Series 6 registered representative, has sent out 27 different emails to 27 different customers this afternoon. What are his communications classified as? |
Individual emails to individual customers are classified as correspondence. |
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A first-year member firm would like to use a new mutual fund advertisement in its sales approach. By whom and in what order, from first to last, will this advertisement be seen? |
First by a principal, then by FINRA, then by the public.
*During its first year of business, or its first year of filing advertisements and sales literature, member firms must have all advertising preapproved by a principal, then filed with FINRA at least ten days before its first use. Only then may the advertisement be seen by the public. |
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A registered representative working for an established member firm would like to use a new piece of literature regarding a mutual fund in his sales approach. By whom and in what order, from first to last, will this sales literature be seen? |
First by a principal, then by the public, then by FINRA. |
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A registered representative working for an established firm wishes to send an email to 35 of his customers this week recommending a new service being offered by his firm. By whom and in what order will this email be seen? |
First by a principal, then by his customers, then by FINRA *If a member firm sends out a retail communication to more than 25 retail investors in a 30-day period, and it contains an investment recommendation or promotes a service or product offered by the firm, it must be preapproved by a principal. If the firm is within its first year of registration, it is pre-filed (10 business days prior to use); if the firm is established, it is post-filed (10 business days after use). |
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A mutual fund prepares an advertisement that contains several footnotes. Is this misleading? |
It is misleading if the footnotes contain significant, material information not contained in the main text of the communication. |
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How should representatives participating in chat rooms treat such communications? |
A public forum or speaking engagement. |
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Under the rules regarding communications with the public, which items are subject to FINRA spot-checking? |
Materials not to be used with the public are not required to be filed with FINRA nor made available for FINRA spot-checking. Any tombstone advertisement dealing with an investment company or insurance company variable contract must be filed within ten days of first use and be available for spot-checking for a period of three years.
Ex. investment company tombstones and sales literature |
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Under the rules regarding communications with the public, which items are excluded from FINRA spot-checking? |
1) red herring prospectus 2) an informational notice giving a member firm's new 800 telephone number 3) a sales script distributed to the firm's branch office and marked "not for public distribution" |
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What makes a communication with the public misleading? |
1) a communication may be deemed misleading based upon the context in which it is used.
2) a statement could be considered misleading when delivered to one audience, but not when delivered to another. |
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Under FINRA's rules regarding communications with the public, what is a member firm's Website is defined as a type of? |
FINRA considers Websites to be a type of retail communication as it is available to more than 25 retail investors within a 30 calendar-day period. |
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Under FINRA's rules on communication with the public, sending an email to a customer would be considered? |
A correspondence |
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What if an associated person enters into an investment joint venture or shared trading profit arrangement with a customer, what needs to happen? |
The profit split must be in proportion to each party's capital contribution unless the account is held jointly by 2 or more family members. |
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Regarding sales inducements and incentives in connection with investment company shares, what practice are considered unethical under FINRA's special deals interpretation? |
The principal underwriter of a mutual fund pays cash bounties and bonuses in significant amounts to registered representatives for opening new accounts. |
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What basis does the investment company select a broker/dealer to execute orders? |
The value and quality of the brokerage service |
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What is a breakpoint sale? |
A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint. |
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When can continuing commissions be paid to a retire representative? |
1) On business generated while employed 2) Only if a written agreement is in effect |
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What happens when a registered rep wishes to a joint account with their brother, who is also his client? |
1) The account can be opened as either tenants in common or as joint tenants with the rights of survivorship 2) representative's principal must approve the opening of the account 3) The Conduct Rules will apply 4) The sharing of profits of losses does not have to be proportional to each party's investment in the account |
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What type of written notice is required when a registered representative wishes to lend money to a customer? |
Written notice to the broker/dealer would be required for a loan from the RR to a friend or someone with whom he has a business relationship. It is not required for loans to immediate family members such as spouses or parents. |
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What is the purpose of the FINRA rule that prohibits analysts from participating in many forms of promotional activity in the investment banking business or having their compensation depend directly on the success of the investment banking department? |
To improve the objectivity and reliability of research reports |
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What is the transaction to avoid a violation for selling at less than the public offering price? |
Transaction between a member and another member |
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When does the Conduct Rules permit selling concessions and discounts? |
Selling concessions and discounts are generally permitted only to other FINRA members. The general public and nonmember firms are not entitled to dealer discounts. |
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What should a mutual fund consider when selecting a broker/dealer through which to execute trades for the fund's portfolio? |
Only a broker/dealer with sound and reputable qualifications |
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What needs to happen for the broker/dealer to transact a mutual fund purchase for a customer and receive discounts from the investment company underwriter? |
1) Both the broker/dealer and the underwriter must be FINRA members 2) There must be a sales agreement in writing between the two |
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Written supervisory procedures should include provisions for the principal to preapprove which types of communications? |
All retail communications. Customer correspondence must be reviewed, not preapproved. |
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When can a member purchase variable contracts from an insurance company underwriter? |
1) There is a written sales agreement in place 2) The member agrees to forfeit all concessions if the contract is redeemed within 7 business days of acceptance |
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Bond mutual fund volatility ratings are designed to assess the sensitivity of the value of a bond fund's portfolio to such things as changes in interest rates, changes in the economy as a whole, and market conditions. What are the factors in the bond fund's volatility rating? |
1) the credit quality of the bonds in the portfolio 2) the fund's overall performance 3) changes in the portfolio share price with time
*the size of the fund's porfolio represents a difference in scale, not volatility |
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Which mutual fund is likely to carry the greatest credit risk in its portfolio? |
The Keppel High-Yield Bond fund.
High-yield bonds are the riskiest of the debt securities given and carry the most credit risk. The small-cap growth fund, though risky, does not carry credit risk but business risk.
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What is not considered non-cash compensation received in connection with the sale and distribution of investment company securities? |
FINRA's list of cash compensation includes any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the sale and distribution of investment company securities. |
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Under FINRA rules, who is it permissible for a registered representative to lend money to? |
1) a client who is a member of his immediate family 2) his cousin who works for another member firm 3) a customer who receives a significant portion of his support from the registered representative
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Under FINRA rules, who is it permissible for a registered representative to borrow money from? |
You may borrow money from an immediate family member who is a client. |
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Who can a registered representative share commissions with? |
A registered representative with our firm or an affiliated firm |
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A mutual fund's Class A shares have a breakpoint at $25,000 where the sales charge drops to 5% and at $50,000 with a drop to 3%. If a registered representative were to bring in a signed application with a check for $45,000, processing the order just like that might be considered: |
A breakpoint sale |
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Your firm is the lead underwriter in a syndicate. During the sales period, you discover that one of the members of your selling group has been suspended by FINRA. What should you do? |
Remove the suspended member from the group |
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Which product permits an illustration of hypothetical returns to be shown? |
Variable life insurance policy |
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Your firm discovers that the ABC International Fund has been directing portfolio trades to your broker/dealer in proportion to the increase in sales of the fund shares by your representatives. What do you do to be compliant with the rules? |
Cease doing business with that fund. No member shall sell shares of an investment company, if the member knows or has reason to know that the investment company, or an investment adviser or principal underwriter of the company, has a written or oral agreement or understanding under which the company directs or is expected to direct portfolio securities transactions to a broker/dealer in consideration for the promotion or sale of shares issued by the company. |
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A member firm has offices in a number of branches of a major regional bank. When the member opens a customer account in one of those facilities, what is required? |
FINRA rules require both oral and written disclosure of the risks and the lack of FDIC coverage. In addition, members must make a reasonable effort to obtain written acknowledgment. |
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A member receives the following inquiry on one of their social media sites, "What is a better investment, purchasing individual stocks or mutual funds?" The firm's response is, "There are a lot of things to consider when choosing between the two options. The answer depends on your goals, objectives, and risk tolerance (among other things). Although we can't provide a recommendation in this forum, here is a link to an article we've recently written on the subject . You may also call us at 1-800-***-**** to discuss this with one of our associates." Given this information, which of the following must occur? |
Interactive forums such as those found on social media sites are defined as a public appearance and therefore filing with FINRA is not required. The article, however, will be considered a form of retail communication that promotes products and services of the firm and filing with FINRA is required. |
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A fifth year firm creates its own ranking system for mutual funds for publication in an advertising campaign. With regard to supervision and filing; what is needed? |
Pre-approval of a principal, filing with FINRA 10 business days prior to use. |
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With regard to social media used for communication, what would result in regulatory sanctions? |
If the BD allows social media to be used to communicate with clients outside the firms electronic network, it must still supervise, review, and maintain records of the communication. Providing copies of the communication would be acceptable. Social media communications are subject to the same recordkeeping rules as public communications (retained for three years). |
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Robert obtained the designation of "Retirement Specialist" by paying a $300 membership fee and maintains it via a $100 annual renewal fee. How will his use of this designation when promoting himself be viewed by FINRA? |
Writing a check to obtain a designation is not a legitimate designation. Firms that allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist may violate several SRO rules and possibly antifraud provisions of the SEC. |
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Jolene is a bank teller that has referred Mrs. Jones to the resident registered representative of ABC Securities. Mrs. Jones then invests $50,000 with the representative. How much of a referral fee can Joelene earn? |
A bank employee that refers a customer to a broker-dealer for a securities transaction can receive "incentive compensation," a "nominal" one-time cash fee for making the referral that is not contingent on whether the referral results in a securities transaction. One of the standard referral fees allowed by FINRA is a flat $25 (to be adjusted for inflation). |
