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1. Notes From 10/28/14
Although deferred growth is very attractive for many investors, the advanced age of this investor is a red
flag. Seniors generally should maintain investment liquidity, which is not accomplished through a
variable annuity because of contingent deferred sales charges that often continue for five to seven years.
When an investor redeems open-end investment company shares,the investor receives the next computed
net asset value (NAV) of those shares.
The key word here is nonqualifed! The investment John made was with after-tax dollars, the money
grows tax-deferred,and only the earnings are taxed at distribution. A computation will be made at John's
retirement called the exclusion ratio, to determine how much of each retirement payment will be treated
as a return of cost basis and how much as taxable ordinary income. No annuity payment is treated as a
distribution of capital gains.
Although a transfer within the same fund family may save a customer a sales charge,he is still liable for
any taxes due. The IRS considers this transaction both a sale and a purchase. Any losses or gains must be
declared on the current year's tax form.
Under the Investment Company Act of 1940, the SEC may prohibit mutual funds from purchasing
securities on margin or selling portfolio securities short. All funds are allowed to borrow funds from and
lend funds to third parties.
If there is an active secondary market for the CMO, investors won’t have a difficult time turning their
investment back into cash (CMO’s with complex characteristics may have limited or nonexistent
liquidity). The other risks are inherent to mortgage-backed securities like CMOs.
Interest on CMOs is subject to federal, state,and local taxation. CMOs pay interest monthly and yield
more than Treasury securities. They are issued by financial institutions, including banks and
governmental agencies like FNMA, and are considered a type of corporate bond not directly backed by
the U.S. government.
A 403(b)(7) plan, a type of tax-sheltered annuity, allows employees to set up retirement plans directly
with mutual fund companies.
Mutual fund performance predictions are strictly prohibited. Past performance,however,must be shown
for a minimum of 10 years or since inception of the fund. Total return computations may be shown on
marketing materials, including information prepared outside of the firm, provided the preparer's name is
disclosed.
A cash or currency transaction totaling more than $10,000 on a single business day must be reported on
FinCEN Form 112.
A preliminary prospectus is frequently referred to as a red herring. This is due to the statement, printed in
red ink, that says that information contained therein may undergo change,completion or amendment. The
effective date is found in the final prospectus only. No payment of any kind may be accepted from
potential investors, and special research reports or other promotional material on the new issue are
prohibited.
Mutual funds may not act as distributors for their own fund shares except under Section 12b-1 of the
Investment Company Act.

2. Which of the following are discretionary orders?
I. A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and
insurance company stocks when the price appears favorable.
II. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price
determined by the agent.
III. A customer instructs an agent to purchase as many shares of XYZ as the agent considers
appropriate.
IV. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time
and price appropriate.
Your answer, II and IV.,was incorrect. The correct answer was: I and III.
Discretion authorizes a representative to choose the security, the amount of shares,or whether to buy or
sell. Time and/or price alone are not discretionary decisions.
A mutual fund's underwriter is also known as the sponsor or distributor of the fund.
Mutual fund portfolios can be diversified or nondiversified. Redemptions are done at the next computed
NAV,not the next computed POP.
The size of the fund, whether in terms of total assets or number of shares outstanding, has little or nothing
to do with performance or suitability for a particular customer.
The current yield on mutual funds is calculated by dividing the annualized yield ($.25 × 4 = $1) by the
POP. In this case,$1 / $30 = .0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the
inclusion of capital gains and growth.
A Section 457 plan is a nonqualified, salary deferred contribution plan established by state and local
governments and employers with tax-exempt status. Earnings grow on a tax-deferred basis, and
contributions are not taxed until the assets are distributed from the plan to the employee.
Government securities, debt offerings with a maturity not exceeding 270 days, and intrastate offerings are
exempt from the registration provisions of the 1933 Act. A stock being offered in three states would have
to register with the SEC and with those states unless qualifying for an exemption as a federalcovered
security.
Prefiling at least 10 business days in advance for the first year is required for firms within their first year
of registration. Obviously, the primary target here is new firms, established firms (over one year old) may
post-file within 10 business days of first use.
A registration statement or disclosure must describe any intent to borrow money. A company's
concentration of investments is part of its required investment policy description. There is no requirement
to describe past performance to the SEC.
The expense ratio includes the expenses of operating the fund compared to fund assets. Expenses included
in the ratio are management fees,administrative fees,transaction costs, and taxes.

3. Rule 34b-1 of the Investment Company Act of 1940 deals with certain misleading statements contained in
mutual fund marketing materials. The rule requires that any investment company whose name implies a
certain type of portfolio composition must have at least 80% of its assets invested as implied.
For conversion and exchange of shares to take place at net asset value, the shares must be within the same
fund family.
When interest rates fall, bond prices rise. The other funds listed hold common stock in their portfolios,
and common stock is not as directly affected by changes in interest rates as are debt instruments.
If the private placement sells to any nonaccredited investors (with the maximum number being 35) no
advertising or general solicitation is allowed. If the sale is exclusively to accredited investors, the private
placement may advertise.
In almost all cases,single premium deferred variable annuities are sold with a contingent deferred sales
charge. This is sometimes referred to as a Conditional Deferred Sales Load.
Fluctuations in interest rates will affect a bond's price, but will not affect the bond's payable interest. The
percentage interest payable for use of money is stated on the face of a bond and is part of the bond
indenture, a legal obligation on the part of the issuing company.
In recruitment interviews, as in advertising, false or extravagant claims may not be made. Both the job
opportunity and the industry must be represented honestly.
A mutual fund's board of directors sets the ex-dividend date,which is normally the business day
following the record date. This is different from the ex-dividend date for corporate stocks in the
secondary market, which is two business days before the record date.
Mutual funds are inherited at their fair market value (FMV) which is the current NAV. When they are
sold, they are redeemed at the then current NAV. In this example, the cost basis is $9.50 per share and the
redemption value is $14.25.
Any retail communication that includes a ranking, whether independent (post-file) or not (pre-file) must
be filed with FINRA. The radio interview is a public appearance with no filing requirements as there is no
indication of any script, slides, or handouts (which would require filing).
Initial public offerings may not be purchased by most FINRA member firms, their employees, or close
family members, including those the employee financially supports. An exception is made for those who
work for limited business broker/dealers, such as those that sell only investment company offerings and
variable contracts.
Rights give stockholders the privilege to purchase a proportionate number ofadditional shares ata specific price for a
limited time.Rights usuallyexpire in 30-45 days.
Retail communication is defined as “anywritten (including electronic) communication thatis distributed or made
available to more than 25 retail investors within any 30 calendar-dayperiod.” An appropriatelyqualified registered
principal ofthe member mustapprove each retail communication before the earlier ofits use or filing with FINRA.
Institutional sales literature maybe reviewed after being sentout.
T-bills are sold at a discountand mature in 4, 13, 26, or 52 weeks.Although they mature at face value, they do not
make interim interestpayments.

4. Members mayallow sales concessions onlyto other (FINRA) member firms.In transactions with customers and
nonmember firms,members mustmaintain the full public offering price.
The InvestmentCompanyAct of 1940 prohibits a mutual fund from borrowing more than whatamounts to 33.33% of
its net assetvalue. In other words,the fund mustmaintain atleasta 3 to 1 assets-to-debtratio.
As yields increase,the price of outstanding debtdecreases and vice versa. The resulting relationship is termed an
inverse relationship.
Only U.S. territorial possessions,legallyconstituted taxing authorities,and public authorities mayissue municipal
debt securities.Churches mayissue bonds,butthey are not municipal bonds.
A Section 457 plan is a nonqualified,salarydeferred contribution plan established by state and local governments
and employers with tax-exempt status.Earnings grow on a tax-deferred basis,and contributions are nottaxed until
the assets are distributed from the plan to the employee.
Prefiling at least10 business days in advance for the firstyear is required for firms within their firstyear of
registration.Obviously,the primary target here is new firms,established firms (over one year old) may post-file within
10 business days offirst use.
The SEC only clears or releases a securityfor sale.It neither approves nor disapproves the offering,nor does it pass
on the accuracy or adequacy of the information contained in the prospectus.A disclaimer regarding this factmustbe
on the front page of the prospectus.
The recommendation ofa short-term debtinstrumentis mostsuitable during a period ofsubstantial interestrate risk,
since they have the smallestprice response.Of the instruments listed,Treasurybills would be the mostsuitable
because oftheir maturity of less than one year.
The bond is a 7% bond.When the yield-to maturity is less than the coupon of 7%, which indicates the bond is selling
at a premium (buthas no bearing on the amountof interestpaid).The total amountpaid each year on 1 bond is $70.
The amountof semi-annual interestis $35.
A bond's nominal yield is fixed as of the date of issue.It identifies the amountofinterestan investor receives and,
once the bond is issued,is not affected by changes in marketinterestrates.It is also known as the coupon rate of the
bond and is stated on the bond certificate.
Since the YTM is greater than the nominal yield,the price mustbe less than par. The bond is selling ata discount.
Treasury stock is a company's stock that has been issued,sold through an offering,and then boughtback by the
company.When a companyrepurchases its own stock,thatstock has no voting rights or dividend rights and is held
in the issuer's treasury.
Institutional sales material is notrequired to have prior principal approval,however each member shall establish
written procedures for the review of institutional communications used bythe member and its associated persons by
an appropriatelyqualified,registered principal.
A proxy is a ballotfor voting on material issues regarding the investmentcompany's operations and is notpart of the
semiannual reportto shareholders.
Currentyield is calculated by dividing annual dividends bythe POP; capital gains maynot be included.
When a customer does notchoose a method,the IRS uses FIFO (first in, first out). This will likely resultin shares with
the lowestcostbasis being redeemed first,which creates a greater taxable gain.
Although marketvalue, book value, and par value are all valuations of common stock,the value mostrelevantto
investors is the marketvalue, which is determined bysupplyand demand for the stock.Book value refers to the
liquidation value of the stock, and par value is assigned for accounting purposes.
The Employee RetirementIncome SecurityAct (ERISA) is the federal law designed to protectthe rights and interests
of participants in a tax-qualified retirementplan.

5. To have a SIMPLE plan,the employer may not have any other qualified plan in place and musthave 100 or fewer
employees.
One of the reasons itis called an omitting prospectus is because the ad omits certain information found in the
prospectus.This is your basic mutual fund tombstone ad.It does notcontain an application to invest, but directs the
prospectto a phone number,website,or other location where a prospectus containing the application maybe
obtained.
Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529
plan.
The variable life exchange provision allows a policyholder to convert the variable policy into a whole life policy within
the first 24 months ofvariable policy ownership.The insurance companymustuse the initial contract date and can
not require proofof insurability.
Under the InvestmentCompanyAct of 1940 an investmentcompanymusthave clearly stated investmentobjectives
and may not borrow beyond a maximum 1:3 debt-to-assetratio.Selling short,buying on margin,and selling
uncovered calls are prohibited.An investmentcompanymaynot issue securities to the public unless ithas minimum
capitalization of at least$100,000.
Unlike Treasurybills,T-notes pay interestevery six months.
The premium is the costof an option contract, expressed in dollars per share ofthe underlying stock. The strike price
is the price at which the stock will be boughtor sold if the contract is exercised,also expressed in dollars per share.
Under IA-1092, financial planners,pension consultants,and sports and entertainmentagents register as investment
advisers.Lawyers,accountants,teachers,and engineers (L.A.T.E.) are not required to register as long as their
securities advice is incidental to their business.
The key word is nonmarketable,which means does not trade in the secondarymarket.Only the savings bonds are
nonmarketable (EEs and HHs).T-bonds and agencyissues are marketable debt.Series EE bonds are sold atface
amountand interestis credited monthly.HH bonds are nonmarketable and payinterestsemiannually.Note: HH
bonds are no longer issued,butmanyhave not yet matured.
The time limitfor a letter of intent is 13 months,butthe letter may be backdated up to 90 days from the date it was
filed. In that case,the investor has ten months to complete the letter.
ong-term debtprices fluctuate more than short-term debtprices as interestrates rise and fall.
Money marketsecurities are high-qualitydebt instruments with a maximum maturityof one year. Treasurybonds are
high quality but issued with maturities ofmore than ten years. All of the other securities listed are both high quality
and issued with maturities ofone year or less.
The moneymarketis the marketplace for short-term (one year or less) debtobligations.The capital marketis where
long- term capital is raised.Municipal bonds,being long term,are a part of the capital market.
A preliminaryprospectus,or red herring, may be distributed during the registration period for a new security. It is only
for the purpose ofobtaining indications ofinterest,notsoliciting sales.It is not a final sale document.
Participating preferred stock allows shareholders to participate in the common dividend in addition to receiving their
fixed dividend.
An increase in bond marketprices caused bya decrease in general interestrates would reduce the currentyield of
any outstanding bonds.
The Securities Act of 1933 requires a prospectus and registration statementdisclosing the relevantfacts concerning
a new issue to be filed with the SEC. The act further requires a prospectus to be distributed before or during a
solicitation for sale so thata prospective purchaser will be fully informed and fairly treated.

6. The blend/core fund would allow the investor to diversify his equity holdings and,in exchange for the usual risks of
equity securities,make some possible gains from growth while investing in a single mutual fund.
Under the InvestmentCompanyAmendments Act of 1970,a contractual plan holder mustbe allowed a full refund of
sales charges ifhe returns his shares within 45 days of the mailing ofthe notice by the custodian bank (the free-look
period).Contractual plans are no longer sold,but there are still plans in effect.
Adjustmentbonds are sometimes called income bonds because theyonly pay interestwhen the companyhas
sufficientincome (as determined bythe Board of Directors.
If a registered representative (RR) did have AGI for the lasttwo years of $200,000 and expected the same this year,
or has a $1 million networth (excluding the net value of their primaryresidence),the RR, like any other individual,
would be accredited.The question gives no indication that the RR meets either standard and therefore is the best
answer.
A letter of intentis a nonbinding contractentered into by an investor for the purpose ofobtaining reduced sales
charges.If the client were to redeem the entire accountbefore fulfilling the terms of the letter, or if the 13 months
elapsed withoutthe full amountbeing invested,the escrowed shares would be redeemed and the proceeds used to
pay the additional sales charge.
When the unitrefund option is chosen,the insurer guarantees,atminimum,to distribute the amountof moneythat
funded the annuity. At the annuitant's death,if the guaranteed amounthas notbeen fully distributed,the survivor
receives the balance of the account; typically, in a lump sum payment.
Initial public offerings maynot be purchased by mostFINRA member firms,their employees,or close family
members,including those the employee financiallysupports.An exception is made for those who work for limited
business broker/dealers,such as those thatsell only investmentcompanyofferings and variable contracts.
According to the Act of 1940, if the investor cancels his variable contractplan within the free-look period (45 days
from the execution of the contract or ten days from delivery of the policy, whichever comes later) he will receive all
moneypaid.
ERISA rules protect private sector retirementplans from mismanagement.Federal governmentand other public
sector retirementplans are covered by other regulations.
During the accumulation phase,the value of an accumulation unitchanges as the currentmarketvalue of the
securities in the portfolio of the separate accountchanges.When the separate accountbecomes worth more,the
value of the accumulation unitis worth more.
The conversion feature allows bondholders to convert their bonds into shares ofstock.Increased earnings mayhave
a positive affect on stock prices and bonds generallyoffer an investor some downside protection when stock prices
are falling.These are all desirable to the bondholder.Adding the desirable conversion feature to the bond allows the
issuer to pay a lower coupon rate than they would pay with a nonconvertible bond.
Any changes in a mutual fund's investmentpolicies or objectives mustbe made by a majorityvote of the fund's
outstanding shares,nota majority vote of shareholders.
The definition of a restricted person under FINRA Rule 5130 includes FINRA member firms,other broker/dealers,and
any officer, director, general partner,associated person,or employee of a FINRA member firm or other broker/dealer.
Immediate familymembers ofsuch specified persons are also included under the definition.
Conversion prices are notsetin competition butare simplysethigher than the currentmarketprice of a company's
stock.
The exchange privilege offers exchange without an additional sales charge,butthe exchange is still taxable. The
customer is taxed on the gain of $12,000 ($40,000 − $28,000).The taxes on $8,000 (dividends and capital gains)
were taxed in the years distribution took place.
Liquid networth and credit card payments involve concrete sums ofmoneyand cash flow and, thus,are financial.
Tax status and risk tolerance do not involve actual sums ofmoneyand,thus,are nonfinancial considerations.

7. Money marketinstruments are high-qualitydebtsecurities issued with a maturity of one year or less.Negotiable CDs
and Treasury Bills are moneymarket instruments,butnonnegotiable CDs and TreasurySTRIPS are not.
With an antidilution feature,the issuer will increase the number ofshares available upon conversion ifthe company
declares a stock splitor stock dividend. This is done to keep the bondholder whole.Originally,the bond converts to
20 shares ($1,000 ÷ 50),because ofthe 10% stock dividend,the bond needs to convert to 22 shares,which means
the conversion price is reduced to $45.45 ($1,000 ÷ 22 = $45.45).
The Coverdell Education Savings Account provides that any withdrawal made for qualified education expenses is free
of income tax. Contributions are made with after-tax dollars and maybe made by anyone who falls within the
earnings limits.
The final prospectus will include information thatis material to investors in order for them to make an informed
decision.The agreementamong underwriters is a separate documentthatis between the members ofthe
underwriting syndicate.Investors do not require knowledge ofwhatis contained in this agreement.
The intereston the bond is paid at maturity but it is taxed as interestincome over the life of the bond,not as a capital
gain.
The USA PATRIOT Act requires firms Broker/dealers to file suspicious activity reports (SARs) involving transactions
of $5,000 or more when financial behavior appears commerciallyillogical and serves no apparentpurpose.The
second depositexceeds the $5,000 threshold.The third depositwould nottrigger a currency transaction report
(CTR), but certainly may indicate Structuring. For a CTR to be triggered,more than $10,000 would need to be
deposited in a single day.
Equity income funds investin common stock,preferred stock,and convertible securities for currentincome and
capital growth.
Why place an ad if potential buyers don’t know who you are and how to reach you? So, the name of the firm placing
the ad mustbe disclosed.A generic (no-name) ad can never mention the name of the specific securitybeing
advertised.That is why it is called a generic ad. Since no name can be mentioned,how can you show performance?
Depending on the type of securitybeing advertised,it may or may not have to be filed with FINRA.
Mutual fund portfolios can be diversified or nondiversified.Redemptions are done atthe next computed NAV, not the
next computed POP.
Duration is a measure ofthe length of time it takes a bond to repay its costthrough internal cash flows (basicallythe
semi-annual interest).A zero-coupon bond pays nothing until it matures,which makes its duration and maturityof the
same length.Interest-bearing bonds have a cash flow prior to maturity, which makes their duration shorter than their
time to maturity.
The only requirementregarding sales charges on a variable annuity is that they mustbe reasonable.
Members of FINRA may give other member firms concessions butmustdeal with the public and nonmembers atthe
public offering price.
The customer owned shares ofthe mutual fund when it distributed the gain and is liable for taxes on the distribution.
This gain is considered long term (over one year) and is taxed at long-term capital gains rates.It does not matter how
long the customer had held the shares when the gain was distributed,buthow long the fund had held the securities
before it sold them.
CMOs are not backed by the full faith and credit of the U.S. government.However, both Ginnie Maes and CMOs are
collateralized by mortgages,yield more than T-bonds,and are pass-through securities.
Market risk is also known as systematic risk (the risk that investors maylose principal due to price volatility of the
overall market).This type of risk cannot be diversified away.
Callabilityis unattractive to the investor. It is attractive to the issuer because,with a call,the bonds are boughtback at
par or a small premium,and interestpayments end.

8. Mutual funds pay dividends from net investmentincome,and shareholders are liable for taxes on all distributions,
whether reinvested or taken in cash.
He may discuss the investmentreturns ofthe mutual fund as long as he uses a specific time frame.When discussing
an investment,he must disclose all material facts pertaining to the investment,both negative and positive.
Gift tax rules do apply to contributions to a Section 529 plan. The limitbeyond which the gift tax applies is an indexed
annual limit.
The tax deferral of investmentincome and capital gains earned bythe portfolio during the accumulation period is one
of the advantages of a variable annuity. Upon withdrawal,however,both the income and the capital gains will be
taxed as ordinaryincome as they are withdrawn.
This customer is a young investor at the beginning ofhis earnings cycle.For other investors in his situation,an
aggressive growth fund mighthelp achieve maximum capital appreciation over a long-term time frame.However,he
is risk averse and has nothad any experience with investing in the securities markets.A balanced fund is a good
place to begin investing for high total return and low volatility.
Assuming the fund has existed for that long,changes in NAV for the pastten years will be found in the prospectus.
GNMA securities,which are backed by the full faith and creditof the U.S. government,are considered to be the
safestof the agency issues.
The complete order of liquidation is as follows:wages,taxes,secured debt,debentures and general creditors,
subordinated debentures,preferred stock,common stock.
Deferred compensation plans are notqualified plans and maybe discriminatory.Keogh,profit-sharing,and corporate
pension plans mustmeetsetstandards for vesting,eligibility,and funding under ERISA.
An UGMA or UTMA accountmay have only one custodian as owner ofrecord and one minor as beneficial owner.
Even man and wife may not serve as joint custodians over an UGMA or UTMA account. Securities mustbe
registered in the name of the adult as owner of record, for the minor,as beneficial owner.Securities maynotbe held
in streetname nor registered onlyin the minor's name.
It is clear that the asking price has decreased while the NAV has increased.This is onlypossible with shares ofa
closed-end fund because their price is based upon supplyand demand,notNAV plus sales charge.
Withdrawal from an annuity is taxed on a LIFO (lastin, first out) basis.Section 1035 permits investors to change from
one annuity to another withouttax, as long as the transfer is not directly to the investor.The customer should also be
warned that there may be penalties imposed bythe insurance companyfor early withdrawal.
The InvestmentCompanyAct of 1940 requires thatat least40% of the board be independent(noninterested)
directors.Consequently,no more than 60% of the directors maybe interested persons.When funds charge 12b -1
fees,a simple majorityof the directors mustbe independent.