Master Finra Series-63 Exam with Reliable Practice Questions
Upgrade to PremiumDesi Genuos is an agent with Broker-Dealer CanDo. A client has asked Desi to recommend a mutual fund that does not have a sales charge. Desi recommends a fund that has no front-end load although it does have a deferred sales load if the investor redeems his shares within the first three years of ownership, but the client has informed Desi that he is looking at this as a long-term investment. Based on these facts, Desi
Correct : A
If Desi recommends a mutual fund that has a deferred sales load to a client who requests a mutual fund with no sales charge, he is in violation of NASAA rules regarding investment company shares. The NASAA rules specify that it is prohibited for an agent to state or imply that the investment has no sales charge if there is a deferred sales load involved. It doesn't matter if, in fact, the deferred load may never have to be paid by the client. A letter of intent involves a statement of intent by the investor to invest an amount that will meet a breakpoint that will entitle him to a lower load charge. This is not pertinent to this specific question.
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When selling shares of an investment company to a client, an agent must provide the client with
I . the fund's prospectus, which provides information on any loads or other fees as well as historical return information.
II . information about any breakpoints if it is a load fund along with an explanation of a letter of intent
III . information regarding the investment adviser used by the fund
IV . an explanation of the various loads and fees outlined in the fund's prospectus
Correct : D
When selling shares of an investment company to a client, the agent must provide the client with the fund's prospectus and provide the client with an explanation of the various loads and fees and any breakpoints that, if reached, will result in a lower load charge for the client, along with information on a letter of intent, which the client can execute. The agent need not provide any information regarding the investment adviser used by the fund although that information is contained in the prospectus as well.
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Which of the following practices would be prohibited in connection with the sale of investment company shares?
I . selling a client shares of a load stock fund when a no load stock fund with the same investment objective exists
II . selling the client shares of five S&P 500 Index mutual funds, offered by different fund families
III . encouraging a client to swap his money between two funds in the same family without informing him that this creates a taxable event
Correct : D
The scenarios described in Selections II and III only would be prohibited. Five S&P 500 Index mutual funds, even if offered by different fund families, all have the same investment objective-duplicating the returns earned on the S&P 500 Index, and they will be invested in very similar stocks. Therefore, the client is getting little or no more diversification of risk by investing in five funds over investing in just one. The agent is just getting richer from more commissions. Encouraging a client to swap his money between two funds in the same family without informing the client that this creates a taxable event is not providing the client with ''full and fair disclosure.'' It may well be in the client's best interest to make the switch, but he needs to be made aware of the tax consequences. It is not necessarily prohibited to sell a client shares of a load stock fund when a no load stock fund with the same investment objective exists as long as the agent believes that the load stock fund is a better investment for his client.
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Which of the following statements would not be in violation of NASAA rules regarding the sale of investment company shares?
I . ''Investing your money in shares of this money market mutual fund is identical to putting your money in a savings account at a bank, except the money market fund provides a higher return.''
II . ''Our U.S. government bond fund is invested only in government bonds issued by the U.S. government and is, therefore, a risk-free investment.''
III . ''You are investing $22,000 in this fund today. The fund has a 5% load at this investment level, but if you sign a letter of intent to invest another $3,000 within the next 13 months, your load will be reduced to 4%. If something comes up and you can't invest the extra $3,000 within 13 months, you will only need to pay the difference in the two loads.''
Correct : C
Only Selection III would not violate NASAA rules regarding the sale of investment company shares because it is the only true statement. If a fund has a breakpoint at $25,000 that triggers a reduced front-end load and allows an investor to receive the reduced load charge if the investor signs a letter of intent stipulating that the additional investment will be made within 13 months, the only penalty to the investor who doesn't meet the breakpoint is payment of the difference in the two loads. Investing in shares of a money market mutual fund is not identical to putting money in a savings account at a bank. The bank account is insured by the FDIC in most cases; the money market mutual fund is not insured by the FDIC, and the investor can lose money (although, to date, money market mutual funds have covered any losses that they've experienced and not passed those losses onto their investors.) A U.S. government bond fund that is invested only in U.S. government bonds is free from default-risk, but it is still subject to interest rate risk. If interest rates increase, the value of the bonds in these funds-and therefore the fund itself-will decrease.
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Which of the following funds can an agent indicate is ''no load?''
Correct : C
A fund with no front-end or back-end load that has 12b-1 fees equal to 0.25% or less of the average net assets of the fund is considered a no load fund. In Choice A, the 12b-1 fees exceed 0.25%, and in Choice B, there is a rear-end load.
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