FINRA Investment Companies and Variable Products 1 — Questions and Answers
Question 1: What is the maximum sales charge (load) permitted on mutual fund shares under FINRA rules?
- 6.25%
- 8.5% (Correct answer)
- 5.0%
- 10.0%
Correct answer: 8.5%
FINRA Rule 2341 limits the maximum sales charge on mutual fund shares to 8.5% of the public offering price.
Question 2: Under the Investment Company Act of 1940, what minimum percentage of a registered open-end investment company's board must consist of non-interested (independent) directors?
- 25%
- 40% (Correct answer)
- 51%
- 75%
Correct answer: 40%
The Investment Company Act of 1940 requires at least 40% of a registered investment company's board to be composed of independent (non-interested) directors.
Question 3: A variable annuity's separate account is best characterized as:
- A fixed account with returns guaranteed by the insurance company
- A portfolio of securities whose value fluctuates with investment performance (Correct answer)
- A money market account guaranteeing principal preservation
- An FDIC-insured savings vehicle held by the insurer
Correct answer: A portfolio of securities whose value fluctuates with investment performance
The separate account holds the underlying investment subaccounts, and its value fluctuates daily based on the performance of those chosen investments.
Question 4: Which mutual fund share class typically has no front-end sales load but imposes a contingent deferred sales charge (CDSC) upon redemption?
- Class A shares
- Class B shares (Correct answer)
- Class C shares
- Institutional shares
Correct answer: Class B shares
Class B shares carry no upfront sales charge but impose a CDSC that declines over time; they often convert to Class A shares after a set holding period.
Question 5: What is the primary structural difference between an open-end and a closed-end investment company?
- Open-end funds invest only in equities; closed-end funds invest only in bonds
- Open-end funds continuously issue and redeem shares at NAV; closed-end funds have a fixed share count traded on exchanges (Correct answer)
- Open-end funds always have lower expense ratios than closed-end funds
- Closed-end funds are not registered under the Investment Company Act of 1940
Correct answer: Open-end funds continuously issue and redeem shares at NAV; closed-end funds have a fixed share count traded on exchanges
Open-end funds (mutual funds) continuously offer new shares and redeem them at NAV, while closed-end funds issue a fixed number of shares that trade on exchanges at market prices.
Question 6: Under FINRA rules, a mutual fund breakpoint discount may be achieved by which of the following?
- Combining purchases made in different, unrelated fund families
- Signing a letter of intent to invest a specified amount within 13 months (Correct answer)
- Purchasing shares simultaneously through multiple broker-dealers
- Combining purchases made by unrelated individuals in the same zip code
Correct answer: Signing a letter of intent to invest a specified amount within 13 months
A letter of intent (LOI) allows an investor to qualify for a breakpoint discount by committing to invest a target dollar amount over a 13-month period.
Question 7: Which of the following is NOT typically a characteristic of a money market mutual fund?
- Seeks to maintain a stable $1.00 per share NAV
- Invests in short-term, high-quality debt instruments
- Provides SIPC protection guaranteeing the $1.00 NAV (Correct answer)
- May offer check-writing privileges to shareholders
Correct answer: Provides SIPC protection guaranteeing the $1.00 NAV
Money market funds are not bank deposits; SIPC protects against broker-dealer insolvency but does not guarantee the $1.00 NAV—money market funds can 'break the buck.'
FINRA Investment Companies and Variable Products 1
What is the maximum sales charge (load) permitted on mutual fund shares under FINRA rules?