FINRA FINRA-SERIES-6 Online Practice Questions and Exam Preparation

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 101:

  A discretionary account authorization permits a registered representative to decide:

  A. whether to make a purchase or a sale.
  B. what specific asset to purchase or sell.
  C. how much of an asset to buy or sell for the account.
  D. all of the above.
  D. all of the above.

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  Explanation/Reference:

  A discretionary account authorization permits a registered representative to decide on all three issues-whether to make a purchase or a sale; what specific asset should be purchased or sold; and how much of that asset to buy or sell.

• Question 102:

  Tex Payor bought shares of the Stocks4U Mutual Fund on February 26th. During the year, the fund sold some of the stocks in which it was invested, generating long-term capital gain income for the fund. Tex received a distribution of some of these gains at the end of the year, based on his proportio nate ownership of the fund.

  Which of the following statements is true regarding the tax consequences of this distribution to Tex?

  A. Tex will have to pay tax on the distribution at his marginal tax rate. Since Tex had not been invested in the fund for over 12 months when the distribution occurred, it is considered to be short -term capital gain income for him, which is taxed as ordinary income.
  B. Tex will have to pay tax on the distribution unless he opts to reinvest the distribution in the fund, in which case the income will not be taxable.
  C. Tex will have to pay tax on the distribution at the tax rate for long-term capital gains, which are currently taxed preferentially.
  D. There are no tax consequences to Tex. Mutual fund investors are taxed only on dividend distributions and on capital gains realized when they sell shares of a fund that they own. Capital gains earned by the fund when securities are bought and sold by the fund's manager are taxed to the fund.
  C. Tex will have to pay tax on the distribution at the tax rate for long-term capital gains, which are currently taxed preferentially.

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  Explanation/Reference:

  When Tex receives distributions of long-term capital gain income earned by a fund that he bought on February 26th, he will have to pay tax on the distribution at the tax rate for long -term capital gains, which are currently taxed preferentially. The amount of time the fund held the securities prior to selling them determines whether the capital gain distribution will be considered long -term or short-term, not the amount of time the investor has owned shares of the fund. All distributions-both dividends and capital gains-are taxable at the shareholder level, not at the fund level.

• Question 103:

  Which of the following would not be required to display prominently the name of the member firm issuing it?

  I. sales literature distributed to an institutional investor

  II. correspondence by a registered representative with her client

  III.

  an advertisement to recruit new registered representatives

  A. I only
  B. I and II only
  C. III only
  D. I, II, and III
  I. sales literature distributed to an institutional investor II. correspondence by a registered representative with her client III. an advertisement to recruit new registered representatives
  C. III only

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  Explanation/Reference:

  Only an advertisement to recruit new registered representatives is not required to display prominently the name of the member firm issuing it.

• Question 104:

  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.
  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.

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  Explanation/Reference:

  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 105:

  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.
  B. 5 members, appointed by the President of the U.S., with Senate approval

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  Explanation/Reference:

  The Securities Exchange Commission consists of 5 members, appointed by the President of the U.S., with Senate approval.

• Question 106:

  Which of the following is not a feature associated with an investment in preferred stock?

  A. The dividend is typically a fixed amount.
  B. If a dividend payment is skipped, it must typically be made up before common shareholders can receive any dividends.
  C. Preferred shareholders usually have the right to vote on members of the board of directors, mergers, and shareholder proposals.
  D. The preferred stock may be convertible to common stock.
  C. Preferred shareholders usually have the right to vote on members of the board of directors, mergers, and shareholder proposals.

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  Explanation/Reference:

  Choice C describes a feature that is not associated with an investment in preferred stock. Preferred shareholders usually have no voting rights whatsoever. Preferred stock usually pays a fixed dividend and is usually cumulative, which means that missed dividends must be made up before common shareholders can receive any dividends. Preferred stock sometimes has a convertible feature, which allows the preferred stockholders to convert their shares to common stock.

• Question 107:

  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.
  A. Ms. Scatty can be held civilly liable under the Securities Act of 1933.

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  Explanation/Reference:

  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 108:

  NewWave Investments, a family of mutual funds, hires the star of a new motion picture about the workings of Wall Street to provide a testimonial as part of NewWave's new television ad campaign. The actor's financial adviser has, in fact, invested some of the actor's monies in NewWave's funds. NewWave provides the actor with a script in which the actor explains the concept of dollar cost averaging to the viewers. At the conclusion of the actor's explanation, the viewers are informed that the actor has been paid for his testimonial, that his experience may not be representative of that of other clients, and that past performance is no guarantee of future performance. Based on these facts:

  A. NewWave has violated no rules; it has complied with all of FINRA's disclosure requirements.
  B. NewWave has violated a FINRA rule stipulating that testimonial providers can receive no payment for their testimonies.
  C. NewWave has violated a FINRA rule that prohibits testimonials of public figures from being used advertisements.
  D. NewWave has violated a FINRA rule requiring that any testimonial that contains a technical aspect related to investing must be given by someone who has both the knowledge and experience to hold a valid opinion on the topic.
  D. NewWave has violated a FINRA rule requiring that any testimonial that contains a technical aspect related to investing must be given by someone who has both the knowledge and experience to hold a valid opinion on the topic.

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  Explanation/Reference:

  When NewWave hires an actor who is unlikely to have the knowledge to understand fully the concept of dollar cost averaging to explain it, it has violated a FINRA rule requiring that any testimonial that contains a technical aspect related to investing must be given by someone who has both the knowledge and experience to hold a valid opinion on the topic. The use of testimonials is not prohibited by FINRA, and providers are allowed be paid for their services.

• Question 109:

  The stock of eBay, Inc. (EBAY) currently has a beta of 1.67. Based on this, which of the following statements are necessarily true?

  I. If the market is up 5%, an investor can expect the returns on eBay to increase by 1.67 times this amount, or 8.35%.

  II. eBay would be a particularly good investment for an investor with a short investment horizon.

  III. The returns on eBay are more volatile than the returns on the market in general.

  IV.

  eBay has more unsystematic risk than the market in general.

  A. I only
  B. I and II only
  C. I and III only
  D. I, II, III, and IV
  I. If the market is up 5%, an investor can expect the returns on eBay to increase by 1.67 times this amount, or 8.35%. II. eBay would be a particularly good investment for an investor with a short investment horizon. III. The returns on eBay are more volatile than the returns on the market in general. IV. eBay has more unsystematic risk than the market in general.
  C. I and III only

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  Explanation/Reference:

  Only Selections I and III are necessarily true. eBay's beta of 1.67 means that if the market is up 5%, an investor can expect the returns on eBay to increase by 1.67 times this amount, or 8.35%, and since eBay's beta is greater than 1.0, we can say that the stock's returns are more volatile than the returns on the market in general. Although eBay may have more unsystematic risk than the market in general, beta is not a measure of this. Beta is a measure of the market, or systematic, risk of the stock.

• Question 110:

  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
  I. a non-diversified management company II. a unit investment trust III. a face-amount certificate company
  A. I, II, and III

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  Explanation/Reference:

  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.