Securities and Tax

You plan to obtain a loan at your local bank for which you will use your 500 shares of ABC stock as collateral. To determine how much collateral value it will assign to the stock, the bank will check the Federal Reserve Board's Regulation:


A) X .
B) U .
C) T .
D) D.

Each of the following is a defined contribution plan EXCEPT:


A) a 401(k) plan.
B) a money-purchase pension plan.
C) a stock option plan.
D) a profit-sharing plan (qualified).

Which of the following statements correctly describe a Roth IRA?

I The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater.
II The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less.
III Contributions are tax deductible.
IVContributions are not tax deductible

Your customer has been investing in a Roth IRA. If he makes withdrawals from it, they will be tax free if:

I the money is to be used to purchase a vacation home.
II he is at least 59½ years old
III the money is to be used to attend evening investment seminars
IV the money has been in his account for at least five years

Under which of the following circumstances can an owner of a Roth IRA take an early distribution without a penalty?


A) When the distribution is used to purchase a first home.
B) Early distributions without penalty are never allowed.
C) After the account has been active for five taxable years and the owner is 50 years old.
D) During times of personal financial hardship.

Individuals licensed as Series 6 representatives


A) deal in closed-end funds without restrictions.
B) deal in closed-end funds in the primary market only.
C) may not deal in closed-end funds.
D) deal in closed-end funds in the secondary market only.

One of your customers set up a Section 529 plan for a child of one of his neighbors and contributed to it for some years. When the child reached age 17, it was obvious that he had no plans to pursue higher education and your customer decided to redesignate the account. Which of the following would be a permissible new beneficiary?


A) The original beneficiary's younger sister.
B) The winner of an informal essay contest to be held among high-school aged children in the neighborhood.
C) One of the donor's own grandchildren.
D) One of the children of another of your customer's neighbors.

Under Internal Revenue Code Section 1035, each of the following exchanges may occur on a tax-free basis EXCEPT the:


A) exchange of a variable life insurance policy for a mutual fund account.
B) exchange of a variable life insurance policy for a variable annuity.
C) exchange of a variable life insurance policy for a whole life insurance policy.
D) exchange of a variable annuity for another variable annuity.

To comply with Regulation SP, a brokerage firm is required to do all of the following EXCEPT:


A) deliver an annual notice of its information collecting and sharing policies to all customers.
B) allow customers to opt out of sharing of financial information with certain nonaffiliated firms.
C) post its privacy policy on its Internet site and in its lobby for public display.
D) provide a notice of privacy policies to all new customers.

All of the following securities would be suitable investments for a traditional IRA EXCEPT:


A) AAA municipal bonds.
B) AAA U.S. government bonds.
C) A corporate bonds.
D) AAA U.S. government agency bonds.

A customer has $250,000 in securities and $200,000 in cash with his brokerage firm. If the brokerage firm were forced to liquidate, how much of the account would SIPC cover?


A) All of the securities and $150,000 of the cash.
B) $200,000 of the securities and $250,000 of the cash.
C) All of the securities and all of the cash.

Which of the following statements about 401(k) plans is NOT true?


A) Employer contributions generate tax-deferred earnings.
B) Employee contributions generate tax-deferred earnings.
C) Employee contributions may be matched wholly or in part by employer contributions.
D) Employer contributions are determined by the company's profits.

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale?


A) Five days.
B) There is no waiting period.
C) 20 days.
D) 31 days.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading?

I Attorney who writes an offering circular for a company
II An investor holding 4% of the company's stock
III The next-door neighbor of a board member of a company
IV Brother of a company's president

ALFA Securities is the managing underwriter for a new issue of one million shares of ABC common. It has agreed to sell all of the stock being offered and to buy, as principal, any stock it cannot sell to the public. ABC will receive the proceeds from the sale of one million shares. This arrangement is known as what type of underwriting?


A) Best efforts.
B) All-or-none.
C) Standby.
D) Firm commitment.

Your customer is 61 years old. He would like to take a lump-sum distribution from his Keogh plan. What is the tax treatment of this distribution?


A) Taxed as ordinary income.
B) 50% penalty.
C) Taxed at long-term capital gains rates.
D) 10% penalty.

In May, an investor bought 100 shares of ABC for $16 per share. If he decides to give the stock to his nephew in December when the stock is selling for $25 per share, what is his nephew's cost basis?


A) $16 per share.
B) $25 per share.
C) $41 per share.
D) $9 per share.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed?


A) FIFO.
B) LIFO.
C) Identified shares.
D) Wash sale rules.

The rules for ensuring that money will be available in a retirement plan (for paying out to participants during their retirement) are covered by which of the following types of requirements?


A) Vesting.
B) Beneficiary.
C) Funding.
D) Participation.

The disclaimer stating that the SEC does not approve or disapprove of a securities issue must appear:


A) on the cover or first page of a prospectus.
B) on all mutual fund advertising and sales literature distributed to prospective buyers.
C) anywhere within a prospectus, provided it is prominently displayed.
D) on all mutual fund tombstones, prospectuses, and advertising material.

Dividend distributions from a bond fund would be taxable:


A) at the federal level only.
B) at the state level only.
C) whether the dividends are received in cash or reinvested.
D) only if the dividends were received in cash.

A client with a self-directed traditional IRA is permitted to make a contribution for this year no later than:


A) April 15 next year.
B) December 31 this year.
C) the filing date of this year's tax return including any IRS approved extensions.
D) April 15 this year.

Regarding the sale of a new issue, a customer becomes a restricted person under FINRA Rule 5130 if he is:


A) the grandfather of an associated person of a member firm.
B) a private investigator collecting information on one of the issuing firm's officers.
C) a salesperson who works for a supplier of the issuing corporation.
D) a salesperson who works for the issuing firm's underwriter.

Which of the following statements regarding the Securities Exchange Act of 1934 is NOT true?


A) It prohibits unequitable and unfair trade practices.
B) It requires registration of broker/dealers with the SEC.
C) It requires registration of securities.
D) It provides for regulation of the over-the-counter market.

Which of the following securities is NOT exempt from the registration provisions of the Securities Act of 1933?


A) An equity security issued in only one state solely to residents of that state.
B) A new stock being offered in 3 states.
C) A U.S. government bond.
D) A high-quality corporate debt security with a maturity of 180 days.

The regular way ex-dividend date for cash dividends is the


A) second business day following the record date.
B) second business day preceding the record date.
C) second business day preceding the settlement date .
D) third business day preceding the record date.

Which of the following plans does NOT allow a catch-up contribution for individuals who are at least 50 years old?


A) IRA.
B) 529
C) 401(k).
D) 403(b).

A securities firm that holds stock rather than sells the stock is:


A) commingling.
B) pegging.
C) churning.
D) taking a position.

Your customer has his own sole proprietorship. He and his wife are the only full-time employees. He would like to start a retirement plan for his business but would like to have access to the funds in the account by means of loans. You would recommend:


A) a traditional IRA.
B) a Keogh plan.
C) a solo 401(k) plan.
D) a Roth IRA.

Which of the following federal acts governs the issue of new securities?

) Securities Act of 1933.B) Securities Exchange Act of 1934.C) Investment Advisers Act of 1940.D) Uniform Securities Act.

A teacher has placed money into a tax-qualified variable annuity over the past 12 years. He has contributed $26,000, and the current value of the annuity is $36,000. If the 62-year-old teacher is in the 30% tax bracket and withdraws $15,000 today, his ordinary income tax liability is:


A) $1,500.00
B) $2,250.00
C) $6,000.00
D) $4,500.00

According to the participation provisions of the Employee Retirement Income Security Act (ERISA), which of the following circumstances would allow an employee to participate in his company's qualified retirement plan?

I The employee is 20 years old.
II The employee has a management position
III The employee has been with the company for three years
IV The employee works part time, five hours each week

Which of the following actions are the responsibility of an investment banker?

I Distributing large blocks of stock to the public and to institutions
II Selling previously unissued securities to an issuer and buying them from the public.
III Raising long-term capital for corporations by underwriting new issues of securities.
IVLending money to corporate customers that require debt financing

For purposes of the Insider Trading and Securities Fraud Enforcement Act, an insider would be best described as:



A) only an officer or director of a corporation whose shares are traded off-floor.
B) an individual with access to information contained in a preliminary prospectus.
C) any individual with access to investment-relevant information not available to the public.
D) any market maker publishing the highest bid and the lowest ask in a subject security.

Capital gains distributions may be combined with income distributions to calculate annual yield on mutual fund shares:


A) when both distributions are accompanied by a source of distribution statement.
B) when both distributions resulted from activities occurring within the same year.
C) when the income distribution contains short-term capital gains.
D) under no circumstances.

Your client, working for a local municipality, tells you that he has the opportunity to participate in a Section 457 plan. Explaining some of the characteristics and features of this type of plan, you could tell him all of the following EXCEPT:


A) earnings on plan assets are taxable on an annual basis.
B) contributions to the plan for eligible employees are made through salary deferral.
C) they can be established by state and local governments and other tax-exempt employers.
D) these are nonqualified plans.

Which of the following activities are characteristic of a primary offering?

I Raising additional capital for the company.
II Selling previously issued securities
III Increasing the number of shares outstanding.
IV Buying previously issued securities

When a customer receives payment during the annuity period of a variable annuity, which of the following is TRUE?


A) The entire amount is subject to tax.
B) All withdrawals are tax free.
C) The investment income is taxed at the capital gains rate.
D) Only the amount that represents investment income is subject to tax.

A registered representative would most likely recommend which of the following retirement programs to be installed for the employees of a charitable nonprofit organization?


A) Variable annuity plan.
B) 401(k) profit sharing plan.
C) 403(b) plan.
D) SEP IRA plan.

Your customer has $300,000 worth of securities, his spouse has $300,000 in securities, and they have a joint account with $400,000 in securities, all held at ALFA securities. If ALFA files for bankruptcy, what is the SIPC coverage?


A) $300,000.00
B) $700,000.00
C) $1,000,000.00
D) $600,000.00

To avoid tax and penalty, an IRA may be rolled over once each:


A) five years.
B) quarter.
C) year.
D) three years.

Under a Keogh plan, which of the following is NOT an acceptable investment?


A) Rare oil painting.
B) Unit investment trust.
C) U.S. government bond.
D) International bond fund.

Distributions from both an IRA and a variable annuity are subject to which of the following forms of taxation?


A) Short-term capital gains.
B) Ordinary income.
C) None - they are tax free.
D) Long-term capital gains.

The phrase employer matching is commonly used when referring to which type of retirement plan?


A) 401(k) plans.
B) Roth IRAs.
C) Traditional IRAs.
D) Money-purchase plan.

The Securities Act of 1933 regulates:


A) offerings of new securities.
B) self-regulatory organizations (SROs).
C) investment advisory firms.
D) broker/dealers and associate members.

Your customer would like to do a 1035 exchange of his variable annuity for a life insurance policy and wants to be sure there will be no adverse tax consequences. You tell him:


A) he may do the exchange, but must pay income tax on any growth the annuity has experienced.
B) 1035 exchanges are not allowed for annuities to insurance.
C) he may do the exchange, but only to variable life insurance.
D) he can get tax deferral for such an exchange, but not tax exemption.

f an investment representative gave her customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are TRUE?

I She should not have distributed sales literature without the prospectus.
II It was okay to distribute the sales literature and send the prospectus later to those who were interested.
III She should not have recommended a specific variable annuity without having the prospectus available.
IVBecause she only answered questions about the investment, she was not required to provide a prospectus.

If an employee makes a withdrawal from her IRA at age 52, she pays no penalty tax if she:


A) has retired.
B) had no earned income that year.
C) is disabled.
D) transferred her account to another custodian.

Any trade made by a registered representative of a FINRA member firm must be reviewed by:


A) a designated principal.
B) FINRA.
C) the Department of Enforcement.
D) the SEC.

A teacher has a 403 (b) tax-qualified deferred retirement plan. The school system she works for has deposited $20,000 for her into the plan during the past ten years. At retirement, the total value of the plan has grown to $29,000. If she withdrawals the entire amount at retirement, what will be the tax consequences?


A) She will owe tax on $9,000.
B) She will owe tax on the entire $29,000.
C) She will owe tax on $20,000.
D) She will have no tax liability.

If a company starts a pension plan for an employee who already has an IRA, this employee:


A) may continue to contribute to his IRA, but the contributions may not be 100% deductible, depending on his level of compensation.
B) may continue to make 100% deductible contributions up to the indexed maximum per year to his IRA.
C) must stop contributing to the IRA, which will continue to accumulate on a tax-deferred basis.
D) must roll over his IRA into the company pension plan.

The primary difference between an underwriting syndicate and a selling group is:


A) the amount of the public offering price.
B) the size of the firms involved.
C) the syndicate assumes liability for unsold shares; the selling group does not.
D) the nature of the securities offered.

Distributions from a profit-sharing plan made to an employee after retirement are from the:


A) amount allocated to the individual's account during the employee's participation in the plan only.
B) amount allocated to the individual's account plus accumulated earnings during the employee's participation in the plan.
C) interest accumulating on the plan's assets.
D) profits on the plan's assets only.