Investment Companies and Variable Products Flashcards

A mutual fund's net asset value (NAV) per share is calculated by:

Answer: Subtracting total liabilities from total assets and dividing the result by shares outstanding

NAV = (Total Assets − Total Liabilities) ÷ Shares Outstanding; open-end mutual funds compute this once daily at market close.

Variable life insurance primarily differs from a variable annuity in that variable life insurance:

Answer: Provides a death benefit in addition to cash value accumulation in the separate account

Variable life insurance combines the investment flexibility of a separate account with a permanent death benefit, which is the core feature that distinguishes it from a variable annuity.

Which of the following is a defining characteristic of a unit investment trust (UIT)?

Answer: It issues a fixed number of redeemable units representing an interest in an unmanaged, fixed portfolio and has a termination date

A UIT holds a fixed, unmanaged portfolio of securities, issues a set number of units, and has a predetermined termination date, after which assets are distributed to unitholders.

Under FINRA rules, 'mutual fund switching' refers to:

Answer: Redeeming shares of one mutual fund and purchasing shares of another fund without a sound investment rationale, often to generate commissions

Mutual fund switching involves selling one fund and buying another without a legitimate reason, typically done to generate transaction-based compensation in violation of FINRA suitability and churning standards.

An investor signs a letter of intent (LOI) to invest $100,000 in a mutual fund over 13 months to qualify for a breakpoint reduction. If the investor only invests $75,000 by the deadline, the broker-dealer will:

Answer: Retroactively apply the higher sales charge applicable to the $75,000 investment level

When an investor fails to fulfill a LOI commitment, the fund retroactively imposes the higher sales load that would have applied to the actual amount invested, typically by redeeming escrowed shares to cover the difference.

Which variable annuity death benefit provision guarantees that a beneficiary will receive at least the total premiums paid into the contract, regardless of investment performance?

Answer: Return of premium death benefit

The return of premium death benefit guarantees the beneficiary will receive no less than total premiums paid, protecting against losses due to poor market performance.

Under FINRA Rule 2330, before recommending a variable annuity, a registered representative must have a reasonable basis to believe that:

Answer: The customer has a sufficient time horizon to benefit from the product and can afford its fees and potential surrender charges

FINRA Rule 2330 requires that a representative determine the customer has an adequate time horizon to benefit from tax deferral and can sustain the product's costs and illiquidity before recommending a variable annuity.