FINRA Series 6 Free Practice Questions Quiz 102

Section 529 College Savings Plan
A Section 529 College Savings Plan is a valuable tool for parents to invest funds on a tax-preferred basis to be used for the costs of college education. Contributions into the plan are made with after-tax dollars, so the benefit of the plan is not experienced at the time of contribution. However, your contributions grow tax-free and can be invested as you choose to allocate the funds within the options available in your specific plan. The funds can be withdrawn to cover any “qualified higher education expenses,” including tuition, room and board, and books and computers.

Share structure and voting rights of shares
Within an open-end investment company, also known as a mutual fund, there may be a number of different share classes available to investors. While each share class invests in the same pool of underlying securities in the same proportion, there are important differences, especially with respect to fees, among the classes.

Board of directors
The board of directors of an open-end investment company, or mutual fund, is tasked under the Investment Company Act of 1940 with overseeing the operations of the fund and ensuring that interests are aligned between the fund, its shareholders, and the fund’s investment adviser. In order to ensure this protection of shareholder interests, at least 40 percent of the mutual fund’s board of directors must be comprised of independent directors. Within the board of directors, there are also typically a number of specific subcommittees that govern certain key areas of importance, such as audit, corporate governance, or compensation.

Investment adviser
The investment adviser within an open-end investment company, or mutual fund, is responsible for the research and execution of the strategy that is set forth in the fund’s prospectus. While the fund’s prospectus contains the objective of the fund and any restricted asset classes or securities in which the fund is not permitted to invest, it is up to the investment adviser to actually execute this strategy and to select the individual securities that will most optimally achieve the fund’s stated objective.

Underwriter (distributor), custodian, and transfer agent
The underwriter (or distributor) within an open-end investment company, or mutual fund, is responsible for selling shares of the fund to investors. Due to the fact that the fund is an open-end investment company, this sale of shares is an ongoing process as sales and redemption of shares must be permitted every day. The custodian of an open-end investment company, often a bank or trust company, is responsible for the safekeeping of the securities and assets of the fund. Additional protection is afforded to the fund’s investors by segregating this activity to a third party who can verify the type of quantity of securities held. The transfer agent, which may be the same entity as the custodian, is responsible for keeping records related to all of the fund’s various transactions and account balances.

Election of directors
The board of directors of an open-end investment company, or mutual fund, is tasked under the Investment Company Act of 1940 with overseeing the operations of the fund and ensuring that interests are aligned between the fund, its shareholders, and the fund’s investment adviser. A mutual fund’s board of directors is nominated for board service either by the existing board members or by the fund company or shareholders. However, the Investment Company Act of 1940 imposes a requirement that at least two-thirds of a fund’s board of directors must have been nominated by the fund’s shareholders.

Evaluation prior to investing
Management experience and investment policies: One of the most important factors when evaluating open-end investment companies is the evaluation of the fund’s management team and experience. On one hand, an investor must look at how long the management team has been in place and if the fund has seen significant turnover in recent years. If so, the investor must consider whether prior returns can be expected to continue given that it was largely a different management team who achieved the fund’s past returns.

Quantitative risk management
Many open-end investment companies, or mutual funds, use a quantitative risk management strategy to mitigate a portion of the downside risk that is inherent in the fund’s investment strategy. To achieve this risk mitigation, funds will purchase certain derivatives and option contracts that are meant to protect the firm from unexpected negative results. There is, however, a cost to such risk mitigation that may also lower expected returns in positive markets.

Calculation of mutual fund investor’s tax basis
A mutual fund investor’s tax basis is calculated as the purchase price of the fund, plus any fees or commissions paid at the time of the purchase, plus any dividends or capital gains distributions that were reinvested. The tax basis ultimately determines the growth of the net asset value at the time of the sale, which will be taxable to the investor. Upon the exchange of a fund, the investor will be taxed just as if the fund was being sold and a new fund purchased.

Taxation of payments
One of the primary benefits to a variable annuity is the tax-deferral of growth within the contract during the accumulation phase. However, it is important to also understand the tax consequences once the policy begins to make distributions. There are two methods under which the taxability of variable annuity payments can be calculated: the Simplified Method and the General Rule. The Simplified Method allows an investor to calculate the tax-free recovery of cost in each payment as the total cost divided by the number of anticipated payments.