FINRA Series 6 Questions + Answers

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FINRA Series 6 Questions + Answers

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Investment Company and Variable Contracts Products Representative Qualification Examination (IR)

QUESTION 1
Commercial paper is:
A. long-term debt issued by commercial banks.
B. short-term, unsecured debt issued by large corporations.
C. issued with maturities of 1 to 2 years.
D. short-term debt that is backed by stocks and bonds that the issuing firm owns.

D. deflation.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: A general decrease in price levels in the economy is referred to as deflation. Disinflation refers to a decrease in the rate of inflation, but price levels in general are still rising. Stagflation refers to an economic condition characterized by high levels of inflation and high unemployment levels. A recession is a prolonged

decline in the general economy, typically measured by a decline in the nation’s gross domestic product (GDP).
QUESTION 3
The Federal Reserve announces that it plans to buy $3.89 billion in Treasury securities on the open market. All else equal, which of the following is a likely result of this Fed action?
A. Interest rates will rise, causing security prices to fall.
B. Money supply will increase, causing interest rates to fall. C. Stock and bond prices should increase.
D. Both B and C are likely results of this Fed action.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: If the Federal Reserve buys Treasury bills on the open market, the money supply is increased, which causes interest rates to fall, and a decrease in interest rates results in an increase in stock and bond prices, all else equal.
QUESTION 4
Which of the following are fiscal policy tools under the jurisdiction of the U.S. Congress?
A. the decision on the amount of cash reserves that a bank must hold
B. the decision on whether to raise or lower effective tax rates
C. the decision on whether to raise or lower the rate at which banks can borrow money from the Federal Reserve D. Both A and B are fiscal policy tools
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: The decision on whether to raise or lower effective tax rates is a fiscal policy tool under the jurisdiction of the U.S. Congress. The decision on the amount of cash reserves a bank must hold (the reserve requirement) and the decision on whether to raise or lower the rate at which banks can borrow money from the Federal Reserve (the discount rate) are monetary policy tools under the jurisdiction of the Federal Reserve.
QUESTION 5
Which of the following actions can be expected to result in a decrease in stock and bond prices, all else equal? I. The Federal Reserve announces a decrease in the discount rate.


II. Congress votes to decrease payments to Social Security recipients.
III. Congress votes to decrease taxes.
IV. The Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market.
A. I and III only
B. II and IV only C. I, II, and III only D. II and III only
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Only Selections II and IV will result in a decrease in stock and bond prices, all else equal. If Congress votes to decrease payments to Social Security recipients or if the Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market, a decrease in stock and bond prices can be expected. A vote by Congress to decrease payments to Social Security recipients results in a decrease in money supply in our economy. Since interest rates can be thought of as the “price” of money, a decrease in the money supply will result in higher interest rates, which results in lower prices in the stock and bond markets. Similarly, if the Federal Reserve sells some of the Treasury securities it owns on the open market, a decrease in the money supply results, leading to an increase in interest rates and a decrease in securities’ prices. When the Federal Reserve decreases the discount rate and when Congress decreases taxes, the money supply is increased. The interest rate-the price of money-subsequently decreases (all else equal), and prices of stocks and bonds increase as a result.
QUESTION 6
When the U.S. dollar appreciates relative to other world currencies,
I. the prices of all domestic stocks and bonds can be expected to increase.
II. the prices of securities offered by manufacturers that import a lot of their parts can be expected to increase. III. an increase in the purchase of U.S. securities by foreign investors can be expected.
A. I, II, and III B. I and II only C. II only
D. III only
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: When the U.S. dollar appreciates relative to other world currencies, the prices of securities offered by manufacturers that import a lot of their parts can

be expected to increase. This is because the dollar will buy more, so the parts will cost these firms less. All else equal, a decrease in expenses leads to increased cash flow, which leads to an increase in the prices of the securities offered by these firms. Not all domestic companies will benefit from the appreciation of the dollar. In particular, firms that export their products overseas may be hurt since their products will now cost the foreign consumer more in terms of their own country’s currency, and they may seek another supplier. A similar argument exists for why Selection III is not correct. U.S. securities will be more expensive to foreign investors, who may decide to invest in other foreign markets.
QUESTION 7
The Securities Act of 1933 did what?
A. It established the requirement that investment advisers be registered with the SEC. B. It established the SEC as the regulatory agency for the secondary market.
C. It established the requirement that new securities be registered.
D. All of the above are correct answers.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: The Securities Act of 1933 established the requirement that new securities be registered. The focus of the Securities Act of 1933 was on the primary market. This act also requires that a prospectus be supplied to all prospective investors. The Securities Exchange Act of 1934 established the SEC as the regulatory agency of the secondary market, and the Investment Advisers Act of 1940 established the registration requirement for investment advisers.
QUESTION 8
Ms. Scatty is a registered representative with a well-known family of mutual funds. When selling one of the funds, she forgets to give her buyer a prospectus. Which of the following statements is true?
A. Ms. Scatty can be held civilly liable under the Securities Act of 1933.
B. Ms. Scatty can be held criminally liable under the Securities Act of 1933.
C. Since mutual funds are not covered under the Securities Act of 1933, there is no liability in this instance. D. Both A and B are true statements.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: If Ms. Scatty forgets to give her buyer a prospectus when selling one of the funds, she can be held civilly liable under the Securities Act of 1933. Unless there was an intent to defraud, she is not subject to criminal penalties. The purchase and sale of mutual fund shares fall under the Securities Act of 1933.


QUESTION 9
Mr. Big of HiGrow Corporation needs more money to support the exceptional growth rate that his firm is enjoying. He meets with BigFee Investment Banker, who agrees to handle the IPO for HiGrow. Subsequently, InTheLoop Brokerage is tapped to be part of the selling group that will handle the sale of the new stock to the public. In this example, the issuer is:
A. Mr. Big
B. HiGrow Corporation
C. BigFee Investment Banker D. InTheLoop Brokerage
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: HiGrow Corporation is the issuer in this example. The issuer is the firm that is receiving the proceeds from the IPO.
QUESTION 10
Mr. Big of HiGrow Corporation needs more money to support the exceptional growth rate that his firm is enjoying. He meets with BigFee Investment Banker, who agrees to handle the IPO for HiGrow. Subsequently, InTheLoop Brokerage is tapped to be part of the selling group that will handle the sale of the new stock to the public. In this example, the underwriter is:
A. Mr. Big
B. HiGrow Corporation
C. BigFee Investment Banker D. InTheLoop Brokerage
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: BigFee Investment Banker is the underwriter in this example. The underwriter is the investment banking firm that helps a firm with the issue of new securities-which includes helping the firm file a registration statement with the SEC and establishing a selling group to facilitate the distribution of the securities to the public.
QUESTION 11
Any person who willfully acts in violation of the Securities Act of 1933, or any SEC rule, is subject to a penalty of:


A. 10 years in prison or a $10,000 fine, or both. B. 5 years in prison or a $10,000 fine, or both. C. 10 years in prison or a $25,000 fine, or both. D. 5 years in prison or a $5,000 fine, or both.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Any person who willfully acts in violation of the Securities Act of 1933, or any SEC rule, is subject to a penalty of 5 years in prison or a $10,000 fine, or both.
QUESTION 12
Mr. Big of HiGrow Corporation needs more money to support the exceptional growth rate that his firm is enjoying. He meets with BigFee Investment Banker, who agrees to handle the IPO for HiGrow. As part of the process, BigFee’s staff works with HiGrow’s accountants to prepare the registration statement that is filed with the SEC. After the issue has been sold to the public, Mr. Sharp, a CPA who has invested in the stock of HiGrow, discovers that there are some accounting irregularities in the financial statements provided in HiGrow’s prospectus.
Who can be sued for the misleading statements?
I. Mr. Big
II. Big Fee Investment Banker III. HiGrow’s accountants
IV. HiGrow’s attorneys
A. I and II only
B. II and III only
C. I, III, and IV only D. I, II, III, and IV
Correct Answer: D Section: (none) Explanation



Explanation/Reference:
Explanation: All of the entities can be sued for misleading statements found in HiGrow’s financial statements. The Securities Act of 1933 holds any individual who participates in bringing the new issue to the public civilly liable for misrepresentations found in the prospectus.
QUESTION 13
Which of the following securities is not exempt from registration requirements?
A. private-placement variable universal life insurance
B. a revenue bond issued by the state of Florida to raise money to build an airport
C. a bond issued by the U.S. post office
D. a new issue of stock issued by a corporation that already has shares of its stock trading on the NYSE
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: A new issue of stock issued by a corporation that already has shares of its stock trading on the NYSE is not exempt from registration requirements. Private placements, municipal bonds, and bonds issued by U.S. government agencies are all exempt from registration requirements.
QUESTION 14
Private placements are exempt from the registration requirements of the Securities Act of 1933 under the rules contained in:
A. Regulation A.
B. Regulation D.
C. Regulation E.
D. the Securities Exchange Act of 1934.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Private placements are exempt from the registration requirements of the Securities Act of 1933 under the rules contained in Regulation D. Regulation D dictates the qualifications that must be met for the security to be exempted, such as the maximum number of unaccredited investors and the investors to whom the security may be sold. Regulation A dictates the rules to qualify an issue for a small issue exemption. The Securities Exchange Act of 1934 deals with the secondary market, not the new issue market.
QUESTION 15


Regulation D:
I. enables smaller firms to raise capital more quickly and more cheaply.
II. exempts the issuing firm from all disclosure requirements as long as the issue is being sold to no more than five investors. III. has restrictions regarding the resale of the securities being sold.
A. I only
B. I and II only C. I and III only D. I, II, and III
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: Only Selections I and III are accurate statements regarding Regulation D. Regulation D enables smaller firms to raise capital more quickly and more cheaply, but it also restricts the resale of the securities being sold in a Regulation D offering. It does not exempt the issuing firm from all disclosure requirements, even if the issue is being sold to only a single investor. The disclosure requirements are minimal with a Regulation D offering, however.
QUESTION 16
Which of the following would qualify as accredited investors for a Regulation D offering?
I. your 45-year-old, spinster aunt who has earned in excess of $200,000 annually over the last ten years as a pediatric surgeon
II. your Uncle Miserly, who is reputed to have a net worth of $1.2 million
III. Tiny Brokers, a small broker-dealer with a single office in the state of Kentucky IV. a trust containing assets that are valued between $3.5 and $4 million
A. I and II only
B. III and IV only C. I, II, and III only D. II and IV only
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: Only Selections I, II, and III describe accredited investors for a Regulation D offering. Individuals with income in excess of $200,000 for the past two years whose income is expected to remain at that level, such as your spinster aunt; investors whose individual net worth exceeds $1 million, such as your Uncle Miserly; and broker-dealers, such as Tiny Brokers all meet the Regulation D qualifications. A trust must have assets in excess of $5 million to qualify.


QUESTION 17
Private placements may be sold to whom?
A. only to institutional investors.
B. only to accredited investors.
C. to as many as 35 non-accredited investors. D. to only 35 investors.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: Private placements may be sold to as many as 35 non-accredited investors. Non-accredited investors must have a purchaser representative to help them evaluate the investment. There is no restriction on the number of accredited investors to whom the securities can be sold. Accredited investors include wealthier, more sophisticated individual investors as well as institutional investors.
QUESTION 18
Which of the following pieces of information may not be contained in a tombstone advertisement under SEC rules?
A. the name of the issuer
B. the name and address of a place where a prospectus can be obtained C. the price of the offering
D. the type of business in which the issuing firm is engaged
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: A tombstone advertisement may not contain the price of the offering under SEC rules. The final price would not have been set at this point anyway.
QUESTION 19
The Securities Exchange Act of 1934:
I. regulates the market for new issues.
II. delineates the registration requirements for investment advisers.
III. regulates secondary market activities.
IV. requires that officers and some other employees of member firms submit their fingerprints to the U.S. attorney general’s office.


A. I and II only B. II and III only C. III and IV only D. I, II, III, and IV
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: Only Selections III and IV accurately describe provisions of the Securities Exchange Act of 1934. The Securities Exchange Act of 1934 provides for the regulation of secondary market activities. One section of the Act (Rule 17f-2) requires that officers and some other employees of member firms submit their fingerprints to the U.S. attorney general’s office. The Securities Act of 1933 regulates the market for new issues, and the Investment Advisers Act of 1940 delineates the registration requirements for investment advisers.
QUESTION 20
Which of the following persons is not subject to the fingerprinting requirements of the Securities Exchange Act of 1934?
I. a registered transfer agent of a securities exchange
II. a firm that engages only in the sale of mutual fund shares
III. a receptionist at a brokerage firm who answers phones and directs calls to the agents employed by the firm IV. a market maker in the over-the-counter market
A. I and III only
B. II and III only
C. II, III, and IV only D. III only
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Only Selections II and III are not subject to the fingerprinting requirements of the Securities Exchange Act of 1934. Firms that engage only in the sale of open-end investment company (mutual fund) shares, as described in Selection II, are exempt; and employees who do not engage in the sale of securities or activities involving any aspect of the securities or monies of a non -exempt firm are exempt, which is the case for the receptionist at the brokerage firm described in Selection III.
QUESTION 21


Which of the following established the requirement that insiders report their trading activities to the SEC?
A. the Securities Act of 1933
B. Regulation D
C. Regulation I-N
D. the Securities Exchange Act of 1934
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: The Securities Exchange Act of 1934 established the requirement that insiders report their trading activities to the SEC. The Securities Act of 1933 deals with new issues, and Regulation D deals with private placements. There is no Regulation I-N.
QUESTION 22
The primary difference between dealers and brokers is that:
A. dealers operate exclusively in the primary market whereas brokers operate only in the secondary market.
B. dealers operate only in the bond market, while brokers conduct trades in stocks, bonds and options.
C. dealers are market makers, who buy and sell out of their own inventory of securities, while brokers are matchmakers, who match buyers with sellers. D. Both Choices B and C describe differences between dealers and brokers.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: The primary difference between dealers and brokers is that dealers are market makers, who buy and sell out of their own inventory of securities, while brokers are matchmakers, who match buyers with sellers. Both dealers and brokers engage in primary and secondary market transactions, and both conduct trades in stocks, bonds, and options.
QUESTION 23
Mr. Walt Street has observed that a Treasury note maturing in November of 2019 and paying a 3.375% coupon has a bid price of 105:25 and an ask price of


105:26.
In this instance, what is the dealers’ spread for every $1,000 of par value?
A. $0.31250 B. $0.10000 C. $0.03125 D. $0.03375
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: For every $1,000 of par value, the dealers’ spread is $0.31250. The prices of Treasury bonds and notes are quoted in 32nds of a dollar per $100 of par value. Therefore, the bid price is $105 25/32, or $105.78125, per $100 of par, and the ask price is $105 26/32, or $105.8125 per $100 of par. The difference between the two is the dealers’ spread per $100 of par value, or $0.03125. The question asks for the dealers’ spread for every $1,000 of par value, so this must be multiplied by 10: $0.03125 x 10= $0.31250.
QUESTION 24
Which of the following is not considered to be a “security” as defined by the Securities Exchange Act of 1934?
A. an interest in an oil drilling lease
B. a collateral trust certificate with an initial maturity of 5 years C. a straddle that expires in 3 months
D. a bankers’ acceptance, issued with a maturity of 4 months
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: A bankers’ acceptance is specifically excluded from the definition of a security under the Securities Exchange Act of 1934 as long as its maturity at issue does not exceed 9 months. All the other choices are specifically named under the Act’s definition of a security.
QUESTION 25
Dr. Floss has just earned his dental degree and wants to establish a private dental practice. He has had a bit of sticker shock at the price of all the equipment this will require him to purchase. Because he still has a large student loan to repay, he has been unable to borrow any money from his financial institution. To raise capital, he decides to sell fifty ownership interests of $1,000 each to interested investors and takes out a full page ad in a local newspaper to advertise this investment. In this scenario:


A. Dr. Floss has not violated any laws since the notes have a face value of only $1,000 and he is selling them to a maximum of 50 different investors. B. Dr. Floss can be charged with criminal fraud under the provisions of the Securities Exchange Act of 1934.
C. Dr. Floss has violated the provisions of the Securities Act of 1933 and may face civil penalties.
D. Dr. Floss has not violated any laws since these ownership interests do not fall under the definition of a security.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: If Dr. Floss offers fifty ownership interests of $1,000 each for sale to interested investors, he has violated the provisions of the Securities Act of 1933, which requires that new securities be registered unless they are exempt from registration, and may face civil penalties. There is no evidence that he has made any misrepresentations or otherwise attempted to defraud investors, so he is not subject to criminal fraud charges. The ownership interests do fall under the definition of a security.
QUESTION 26
What did the Howey Decision?
A. provided for fixed annuities to be excluded from the definition of a security.
B. defined an investment contract as any investment of money in a common enterprise with the expectation of earning a profit from the efforts of others.
C. stipulated that all general partnerships were investment contracts and, therefore, securities, as defined by the Securities Exchange Act of 1934.
D. determined that certificates of deposit issued by a bank and insured by the FDIC did not qualify as securities, as defined by the Securities Exchange Act of 1934.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: The Howey Decision defined an investment contract as any investment of money in a common enterprise with the expectation of earning a profit from the efforts of others. General partnerships do not fall under the definition of investment contracts since the general partners are actively involved in the business operations. Although both fixed annuities and bank CDs are excluded from the definition of a security, this was not part of the Howey Decision.
QUESTION 27
The Securities Exchange Commission consists of:
A. 6 members, elected by member firms.
B. 5 members, appointed by the President of the U.S., with Senate approval C. 7 members, appointed by FINRA.


D. 5 members, appointed by the Secretary of Treasury of the U.S.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: The Securities Exchange Commission consists of 5 members, appointed by the President of the U.S., with Senate approval.
QUESTION 28
Which of the following would be a reason for a person to receive a statutory disqualification from membership in FINRA?
A. The person is on the verge of financial insolvency.
B. The person has been barred from membership in one of the national exchanges.
C. The person has made a misleading statement of material fact on the membership application.
D. All of the above are reasons for a person to receive a statutory disqualification from membership in FINRA.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: All of the choices are reasons for a person to receive a statutory disqualification from membership in FINRA. A person is subject to a statutory disqualification from membership in any self-regulatory organization (SRO) if it is considered to be financially weak, if it has been barred from membership in any other SRO, or if it has made a misleading statement of material fact on the membership application. Nor is this an exhaustive list of reasons that a person would face a statutory disqualification.
QUESTION 29
Which of the following is not one of the rules stipulated by the Securities Exchange Act of 1934?
A. All securities’ exchanges and SROs are required to register with the SEC.
B. All brokers and dealers are required to be members of a national securities association.
C. Investment companies are prohibited from using any sales literature that contains an omission of a material fact.
D. Firms are required to send copies of their annual reports to investors before an annual meeting at which directors are to be elected.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:


Explanation: The rule prohibiting investment companies from using any sales literature that contains an omission of a material fact is not one of the rules stipulated by the Securities Exchange Act of 1934. This involves the market for new securities and, as such, is a rule stipulated by the Securities Act of 1933. The 1934 Act deals with the secondary market.
QUESTION 30
Which of the following persons would not fall under the definition of “investment adviser,” under federal guidelines?
A. an individual who advises only Oprah Winfrey on her investment portfolio and receives a nice salary for doing so.
B. a Denver-based, broker-dealer that is registered as a broker-dealer with the SEC and provides investment advice to members of the Denver Broncos, the Colorado Rockies, the Denver Nuggets, and the Colorado Avalanche organizations in exchange for box seats at their games. No monetary compensation is expected or given.
C. an individual who works as an agent for a broker and occasionally gives investment advice to clients who request it, but receives no additional compensation for doing so.
D. None of the above would fall under the definition of “investment adviser,” as defined by the Investment Advisers Act of 1940.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: An individual who works as an agent for a broker and occasionally gives investment advice to clients who request it, but receives no additional compensation for doing so would not fall under the definition of “investment adviser,” under federal guidelines. In 1987, Release IA -1092 expanded the definition to include individuals providing investment advice to entertainers or athletes, among others. The compensation need not be monetary. Box seats at athletic events would be considered compensation for advisory services.
QUESTION 31
Mr. Bashful, Mr. Sleepy, Mr. Doc, Mr. Grumpy, Mr. Sneezy, and Mr. Happy are all employees of S. White Investment Advisers. Mr. Doc, Mr. Sneezy, and Mr. Happy give investment advice to the firm’s clients and manage their portfolios. Mr. Sleepy greets clients and makes cold calls to solicit more business for the firm. Mr. Bashful performs general clerical services, such as filing. Mr. Grumpy is the office manager and is the direct supervisor of the other five employees.
Which of S. White’s employees must register as investment adviser representatives under the Investment Advisers Act of 1940?
A. only Mr. Grumpy
B. Mr. Grumpy, Mr. Doc, Mr. Sneezy, and Mr. Happy
C. Mr. Grumpy, Mr. Doc, Mr. Sneezy, Mr. Happy, and Mr. Sleepy D. All of them must register as investment adviser representatives.
Correct Answer: C Section: (none) Explanation


Explanation/Reference:
Explanation: Mr. Grumpy, Mr. Doc, Mr. Sneezy, Mr. Happy, and Mr. Sleepy must register as investment adviser representatives under the Investment Advisers Act of 1940. Only Mr. Bashful need not register since he performs only clerical duties. Any employee who makes investment recommendations and/or manages client portfolios and any employee who solicits or offers investment advisory services must register. Anyone who is a supervisor to those performing these duties must also register.
QUESTION 32
Which of the following would not have to register as an investment adviser or an investment adviser representative under the Investment Advisers Act of 1940?
I. an insurance agent who sells only whole life and term life policies
II. a commodity futures broker
III. a bank employee who sells the bank’s customers only CDs and other bank securities that are FDIC-insured
IV. a person that is registered as a broker-dealer with the SEC that also provides investment advice to its customers for additional compensation

A. I and III only
B. I, II, and III only C. II and III only D. I, II, III, and IV
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Only the persons described in Selections I, II, and III would not have to register as an investment adviser or an investment adviser representative under the Investment Advisers Act of 1940. Whole life and term life policies, commodity futures, and FDIC-insured bank products are excluded from the definition of a security, and those persons selling these products need not register. Therefore, the insurance agent, the commodity futures broker, and the bank employee who sells only FDIC-insured bank securities need not register. Even if a person is registered as a broker-dealer with the SEC, if that entity also provides investment advice to its customers for additional compensation, it must register as an investment adviser.
QUESTION 33
Under the Investment Company Act of 1940, an investment company is:


A. required to register with the SEC.
B. any company that holds investment securities that have a value that is greater than 40% of the company’s total assets. C. any issuer whose primary business involves investing, reinvesting, or trading in securities.
D. All of the above accurately describe an investment company as defined by the Investment Company Act of 1940.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: All of the choices accurately describe an investment company as defined by the Investment Company Act of 1940.
QUESTION 34
Rank the following entities with regard to the priority of their claims on a firm-from the highest priority to the lowest priority-in the event of bankruptcy.
I. common shareholders II. preferred shareholders III. secured bondholders IV. debenture holders
A. III, II, IV, I B. II, III, I, IV C. III, IV, II, I D. IV, III, II, I
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: Choice C correctly ranks the entities with regard to the priority of their claims on the firm in the event of bankruptcy, from the highest priority to the lowest priority. Secured bondholders get paid first, then debenture (unsecured bond) holders, followed by preferred shareholders. Common shareholders come in last.
QUESTION 35
Which of the following bonds would not be considered investment grade?
A. a municipal bond with a BB rating.
B. a corporate bond with a BBB rating.
C. a general obligation bond with an AA rating.


D. a debenture with an A rating.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: A municipal bond with a BB rating would not be considered investment grade.
Regardless of whether a bond is issued by a state or local government or a corporation, to be considered investment grade it must be rated BBB or higher.
QUESTION 36
Under the Investment Company Act of 1940, an investment company must:
A. provide a prospective investor with a copy of its registration statement when offering shares for sale. B. maintain a minimum net worth of $5 million.
C. have a board of directors composed of no more than 50% who are “interested persons.”
D. include a statement of its investment policy in its prospectus.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: Under the Investment Company Act of 1940, an investment company must include a statement of its investment policy in its prospectus. It must provide prospective investors with a current prospectus, not its registration statement, when offering shares for sale. It must maintain a minimum net worth of only $100,000, and its board of directors can consist of up to 60% of interested persons.
QUESTION 37
Which of the following would not be defined as an “interested person,” under the Investment Company Act of 1940?
A. an employee of the company
B. a person who owns at least 5% of the voting stock of the company
C. the spouse of an officer of the company
D. All of the above would be defined as interested persons under the Investment Company Act of 1940.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:


Explanation: All of the choices describe entities who would be defined as interested persons under the Investment Company Act of 1940. An interested person includes officers, directors, investment advisers, partners, employees, anyone who owns at least 5% of the voting stock of the company, and any immediate family members of these persons. The definition also extends to the principal underwriter and other investment companies served by that underwriter and anyone who has acted in a professional capacity for the company within the last two years.
QUESTION 38
Which of the following investment companies will always be passively managed?
A. a face-amount certificate company B. a unit investment trust
C. a mutual fund
D. a closed-end investment company
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: A unit investment trust is always passively managed. Some mutual funds, such as index funds, may also be passively managed, but not all mutual funds are passively managed.
QUESTION 39
Which of the following would be required to register as an investment company?
I. a non-diversified management company II. a unit investment trust
III. a face-amount certificate company
A. I, II, and III B. II only
C. II and III only D. I and II only
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: All three choices must register as an investment company since all meet the definition of an investment company under the Investment Company Act of 1940. A management company refers to either a closed-end or an open-end investment company, both of which must register, regardless of the diversification of


their investments.
QUESTION 40
Which of the following correctly describes a difference between closed-end and open-end investment companies?
A. Open-end investment companies have a fixed number of shares; closed-end companies can create new shares if there are more buyers than sellers.
B. Open-end investment company shares will never be offered at a price below the net asset value per share of the fund; this is not true of closed-end companies. C. Open-end companies may invest in non-diversified portfolios; closed-end companies are required to invest only in diversified portfolios.
D. Shares of open-end companies sell on exchange floors; shares of closed-end companies are bought and sold through the company itself.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: A difference between closed-end and open-end investment companies is that open-end investment company shares will never be offered at a price below the net asset value of the fund; this is not true of closed-end companies. The shares of open-end investment companies (mutual funds) are bought (and sold) through the company itself at net asset value or net asset value plus a load charge.
Therefore, the offer price will always be greater than or equal to the fund’s net asset value per share.
Closed-end company shares are bought and sold on exchange floors, and the price is set by supply and demand, so closed-end shares may sell for less than the net asset value of the fund. Closed-end companies have a fixed number of shares. Open-end companies can create new shares if there are more buyers than sellers. Both types of management companies can be either diversified or non-diversified in their holdings.
QUESTION 41
Which of the following statements regarding a unit investment trust (UIT) is false?
A. A UIT has a fixed number of shares.
B. UITs are actively managed.
C. Shares of UITs trade on exchange floors.
D. All UITs are established with a termination date.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: The statement that UITs are actively managed is the false statement. All UITs are passively managed. They do have a fixed number of shares that may either be redeemed through the trust or traded on exchange floors, and all UITs are established with a termination date.
QUESTION 42


A face-amount certificate company:
A. is a company that invests primarily in bonds that sell at either par value or a premium. B. is an investment company that has management fees.
C. sells its debt, which is backed by the assets owned by the company, to its investors. D. is all of the above.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: A face-amount certificate company sells its debt, which is backed by the assets owned by the company, to its investors. It does not invest primarily in bonds that sell at or above par value, and it does have management fees that are paid to the portfolio managers of the company.
QUESTION 43
Which of the following is exempt from registering as an investment company under the Investment Company Act of 1940?
A. a unit investment trust
B. a non-diversified mutual fund
C. a company that sells its securities only to accredited investors D. a company that has no sales charges or management fees
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: A company that sells its securities only to accredited investors is exempt from registering as an investment company under the Investment Company Act of 1940. All the other choices describe investment companies that are required to file a registration statement with the SEC.
QUESTION 44
Which of the following describes a difference between a unit investment trust (UIT) and a mutual fund?



A. UITs have a fixed number of shares; mutual funds do not.
B. UITs are not required to distribute dividends and capital gains to their shareholders as mutual funds must. C. UITs must hold non-diversified portfolios; mutual funds may be either non-diversified or diversified.
D. All of the above describe differences between a UIT and a mutual fund.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: The difference between a unit investment trust and a mutual fund is that UITs have a fixed number of shares; mutual funds do not. Both UITs and mutual funds are required to distribute dividends and capital gains to their shareholders and both may invest in either diversified or non -diversified portfolios.
QUESTION 45
Which of the following is a characteristic of a mutual fund?
A. shares may sell below net asset value
B. shares are bought and sold through the fund
C. shares are sold on exchange floors
D. the fund has a fixed number of shares that can be sold
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Mutual fund shares are bought and sold through the fund itself. The shares will sell for at least net asset value, unlike shares of a closed-end investment company wherein prices are set by supply and demand forces. Mutual funds are open-end investment companies and have no fixed number of shares.
QUESTION 46
A mutual fund may not do which of the following, under any circumstances?
I. buy securities on margin
II. engage in short sales
III. change its investment objective
IV. invest in more than 1% of the outstanding voting stock of another investment company
A. I and II only
B. I, II, and III only C. III and IV only


D. III only
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: A mutual fund may not buy securities on margin or engage in short sales, under any circumstances. It may change its investment objective, with shareholder approval. It is permitted to invest in up to 3% of the outstanding voting stock of another investment company.
QUESTION 47
Upon receiving approval via a majority vote of its shareholders, a mutual fund is permitted to:
A. change from a diversified company to a non-diversified company.
B. engage in margin transactions.
C. retain any dividends and capital gains that it earned on its portfolio rather than paying them out to the shareholders. D. issue preferred stock.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: Upon receiving approval via a majority vote of its shareholders, a mutual fund is permitted to change from a diversified company to a non-diversified company. The fund is not allowed to engage in margin transactions, fail to make dividend and capital gain distributions, or issue preferred stock under any circumstances.
QUESTION 48
Which of the following statements regarding closed-end investment companies is false?
A. A closed-end investment company may not issue preferred stock.
B. Shares of a closed-end company may sell for below the fund’s net asset value.
C. Closed-end companies may be either diversified or non-diversified.
D. The closed-end investment company does not pay taxes on the dividend and capital gain income it earns and distributes to its shareholders.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:


Explanation: The false statement is that a closed-end investment company may not issue preferred stock. Although open-end companies (mutual funds) are prohibited from doing so, this is not a restriction governing closed-end companies. Closed-end companies shares sell on exchange floors and may trade below net asset value. Closed-end companies may be either diversified or non-diversified, and the income earned by the company and distributed to its shareholders is not taxed at the investment company level. It is taxed at the shareholder level only.
QUESTION 49
12b-1 fees refer to:
A. the front-end or back-end load that a mutual fund charges.
B. the management fees of a mutual fund.
C. fees that some mutual funds charge to pay for certain of its marketing expenses. D. fees that mutual funds pay the broker-dealers that execute their trades.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: 12b-1 fees are fees that some mutual funds charge to pay for certain of its marketing expenses.
QUESTION 50
Which of the following qualifies as an insider under the definition provided by the Securities Exchange Act of 1934?
I. a member of the board of directors of a firm
II. the vice-president of marketing of a firm
III. an investor who owns 5% of the voting stock of the firm IV. the daughter of the CEO of a firm
A. I and II only
B. I, II, and III only C. I, II, and IV only D. I, II, III, and IV
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation: Selections I, II, and IV all describe individuals who qualify as insiders under the definition provided by the Securities Exchange Act of 1934. An insider is any director or officer of the firm or any member of their immediate family. An investor who owns 10% of the voting stock of the firm and his immediate family members are also classified as insiders; an investor who owns 5% of the voting stock does not fall within the guidelines of the definition.


QUESTION 51
Under the 1988 Insider and Securities Enforcement Act, a person convicted of insider trading can be subject to:
A. up to 10 years in prison and a fine of either $1.5 million or up to 150% of the amount of profits gained or losses avoided, or both.
B. up to 5 years in prison, a $150,000 fine, or both.
C. up to 10 years in prison and a fine of $1,500,000 or both.
D. up to 10 years in prison and a fine of either $1 million or up to 3 times the amount of profits gained or losses avoided, whichever is greater.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: The 1988 Insider Trading and Securities Enforcement Act increased the penalties for a person convicted of insider trading to up to 10 years in prison and a fine of either $1 million or up to 3 times the amount of profits gained or losses avoided, whichever is greater.
QUESTION 52
Ms. Ears is an investment adviser representative. During lunch today, she overheard two men talking about a hostile takeover that their firm was preparing to undertake. Based on this information, Ms. Ears does not hesitate to advise the client she meets with immediately after lunch--Mrs. Clueless-- to invest a sum of money in the firm the men had named as the target firm. Ms. Ears remembers that the price of target firms, on average, increases significantly with an announcement of this sort, but she does not inform Mrs. Clueless of the reason underlying her recommendation.
Has there been any violation of insider trading laws in this scenario, as described?
A. No. The scenario does not suggest that Ms. Ears herself made any investment in the target firm, and Mrs. Clueless was not made aware of the basis for Ms. Ears’ recommendation.
B. Yes. In making a recommendation based on information that was not publicly available, Ms. Ears has violated insider trading laws and is subject to both civil and criminal penalties.
C. No. Ms. Ears is not considered to be an insider of the company preparing the hostile takeover.
D. Yes. Both Ms. Ears and the two men have violated insider trading laws. The two men are prohibited from discussing such private information in a public setting, and Ms. Ears is prohibited from making a recommendation based on that information.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: Yes. In making a recommendation based on overhearing news of an upcoming hostile takeover--information that was not publicly available--Ms. Ears has violated insider trading laws and is subject to both civil and criminal penalties. The men, although guilty of indiscretion in their conversation, have not violated


any securities’ laws.
QUESTION 53
Which of the following statements regarding insider trading penalties is true?
A. The SEC may seek both civil and criminal penalties against an individual who is found guilty of insider trading.
B. Any contemporaneous trader who has lost money due to an illegal insider trade may sue the violator for both the amount of his losses and pain and suffering, as determined by the court.
C. A broker-dealer who is found to have provided inadequate supervision over an agent who is found guilty of insider trading is also subject to insider trading penalties.
D. Both A and C are true statements.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation: Both A and C are true statements regarding insider trading penalties. The SEC may seek both civil and criminal penalties against an individual who is found guilty of insider trading, and a broker-dealer who is found to have provided inadequate supervision over an agent who is found guilty of insider trading is also subject to insider trading penalties. Any contemporaneous trader who has lost money due to an illegal insider trade may sue the violator, but only for his losses, and not for pain and suffering.
QUESTION 54
Which of the following is not one of the purposes of FINRA as stated in its articles of incorporation?
A. maintain a fair and orderly securities market
B. encourage members to uphold high ethical standards
C. develop lines of communication between the securities industry and governmental agencies D. police members and assist with dispute settlements
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation: FINRA’s articles of incorporation does not state that one of FINRA’s purposes is to maintain a fair and orderly securities market. All the other selections are stated purposes. The articles of incorporation also state that FINRA has the power to write and enforce rules for its members to promote fair practices.
QUESTION 55
After three warnings, Honest Investments was forced to terminate Sly Conman, one of its representatives, for making inaccurate statements when offering its

mutual fund products to customers. Given this scenario:
A. Honest must provide FINRA with an electronic notification of the termination within 48 hours and provide a written copy of the submitted form to Mr. Conman within 30 days of the filing.
B. Honest must provide FINRA with an electronic notification of the termination within 30 days and provide a written copy of the submitted form to Mr. Conman within that same period of time.
C. Honest must provide FINRA with an electronic notification of the termination within 48 hours and provide a written copy of the submitted form to Mr. Conman within 10 business days.
D. Honest must provide FINRA with an electronic notification of the termination within 48 hours and mail a written copy of the submitted form to both FINRA and Mr. Conman within 14 days.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation: When Honest Investments terminates Mr. Conman, the firm must provide FINRA with an electronic notification of the termination within 30 days and provide a written copy of the submitted form to Mr. Conman within that same period of time.
QUESTION 56
After three warnings, Honest Broker-Dealer was forced to terminate Sly Conman, one of its representatives, for making inaccurate statements when offering its mutual fund products to customers.
After his registration is terminated:
A. Mr. Conman can apply for reinstatement of his license after 12 months.
B. Mr. Conman remains under the jurisdiction of FINRA for a period of 1 year.
C. Mr. Conman remains under the jurisdiction of FINRA for a period of 2 years.
D. Mr. Conman can apply for reinstatement of his license after 6 months, but will have to pay any applicable fees and retake a test.
Correct Answer: C Section: (none) Explanation
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