Series 6 Exam AudioLearn - Complete Audio Review for the Series 6 Securities License Exam

Series 6 Exam Prep

TABLE OF CONTENTS Introduction: Why the Series 6 Exam is Required .......................................................................... 1 What Having the Series 6 Will Allow You to Do in Your Business ............................................... 1 How the Series 6 Exam is Organized ........................................................................................... 2 What to Expect from This Study Material ................................................................................... 3 Section 1: The Financial Services Regulatory Environment ............................................................ 1 Understanding the Financial Industry Regulatory Authority ...................................................... 1 The Securities Act of 1933 ........................................................................................................... 3 The Securities Exchange Act of 1934 .......................................................................................... 5 The Securities and Exchange Commission .................................................................................. 8 The Trust Indenture Act of 1939 ................................................................................................. 9 The Investment Company Act of 1940 ........................................................................................ 9 The Investment Advisers Act of 1940 ....................................................................................... 10 The Sarbanes Oxley Act of 2002 ................................................................................................ 10 The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 ........................... 11 Jumpstart Our Business Startups Act of 2012 ........................................................................... 11 FINRA Rules and Bylaws ............................................................................................................ 11 Breakpoint Sales .................................................................................................................... 12 Investment Company Securities ............................................................................................ 15 Variable Contracts ................................................................................................................. 18 Standards of Commercial Honor and Principles of Trade ..................................................... 21 Customers' Securities or Funds ............................................................................................. 22 Borrowing From or Lending to Your Customers .................................................................... 24 Influencing or Rewarding the Employees of Others.............................................................. 25 Using Information that is Obtained in a Fiduciary Capacity .................................................. 26 Dealing with Non-Members and Continuing Commissions................................................... 26 i

Insider Trading and How to Avoid It.......................................................................................... 29 The Primary and Secondary Marketplace / Issuing and Trading Securities .............................. 33 Evaluating Products and Investment Vehicles .......................................................................... 38 Life Insurance ......................................................................................................................... 39 Annuities ................................................................................................................................ 48 Equities .................................................................................................................................. 52 Debt Securities ....................................................................................................................... 55 Options................................................................................................................................... 58 Investment Company Products ............................................................................................. 60 Exchange Traded Funds ......................................................................................................... 68 Retirement Plans ................................................................................................................... 69 Tax Considerations and the Type of Taxes Your Customers May Incur .................................... 83 Key Takeaways for Section 1 ..................................................................................................... 86 Section 1 Practice Quiz .............................................................................................................. 89 Section 1 Practice Quiz Answers ............................................................................................... 92 Section 2: What Makes for a Suitable Recommendation ............................................................. 94 FINRA Suitability Rules .............................................................................................................. 95 Components of the FINRA Suitability Rule ................................................................................ 96 Evaluating Client Profiles ........................................................................................................... 98 Key Takeaways for Section 2 ................................................................................................... 101 Section 2 Practice Quiz ............................................................................................................ 102 Section 2 Practice Quiz Answers ............................................................................................. 105 Section 3: Understanding Fiduciary Responsibilities .................................................................. 107 Properly Evaluating Your Clients' Objectives .......................................................................... 107 Creating Investment Strategies that are Based on Client Objectives and Other Key Factors 117 The Many Types of Financial Risk............................................................................................ 120 Key Takeaways for Section 3 ................................................................................................... 127 Section 3 Practice Quiz ............................................................................................................ 128 ii

Section 3 Practice Quiz Answers ............................................................................................. 131 Section 4: Opening Client Accounts ............................................................................................ 133 Types of Customer Account Ownership .................................................................................. 134 Business Accounts................................................................................................................ 137 Fiduciary or Custodial Accounts .......................................................................................... 138 Discretionary Accounts ........................................................................................................ 141 Cash Accounts versus Margin Accounts .............................................................................. 142 Customer Account Transfers ............................................................................................... 145 Making Sure You Stay Within the Financial Industry Guidelines ........................................ 149 Knowing and Working with Your Customers ....................................................................... 150 Providing Recommendations that Meet Your Customers' Needs....................................... 152 Understanding Anti-Money Laundering .............................................................................. 155 Constructing Suitable Recommendations ........................................................................... 159 Properly Executing Orders ................................................................................................... 161 Key Takeaways for Section 4 ................................................................................................... 162 Section 4 Practice Quiz ............................................................................................................ 164 Section 4 Practice Quiz Answers ............................................................................................. 167 Section 5: Record Maintenance Requirements .......................................................................... 169 The Recording and Maintenance of Customer Transaction Records ..................................... 170 The Financial Industry Regulatory Authority Supervision Rule ............................................... 174 FINRA and NASD Rules Regarding Communications ............................................................... 178 Other FINRA Rules ................................................................................................................... 179 FINRA Code of Arbitration Procedure ..................................................................................... 181 Key Takeaways for Section 5 ................................................................................................... 183 Section 5 Practice Quiz ............................................................................................................ 185 Section 5 Practice Quiz Answers ............................................................................................. 188 Section 6: What to Expect Before, During, and After Taking the Series 6 Exam ........................ 190

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Series 6 Examination Content ................................................................................................. 190 Strategies for Taking the Test.................................................................................................. 194 Narrowing Down the Proper Answer from the Options Provided .......................................... 197 Ensuring that You Go at the Proper Pace ................................................................................ 198 Making Your Series 6 Test Taking Plan .................................................................................... 198 Series 6 Continuing Education Requirements ......................................................................... 199 Conclusion ................................................................................................................................... 200 Wrap Up .................................................................................................................................. 200 Where to Go From Here .......................................................................................................... 201 Practice Test ................................................................................................................................ 202 Practice Test Answer Key ............................................................................................................ 226 Sources ........................................................................................................................................ 242

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INTRODUCTION: WHY THE SERIES 6 EXAM IS REQUIRED In many industries, taking and passing standardized tests is a key component of getting started in the business, as well as for ensuring that industry representatives maintain continuing education requirements. This is particularly the case in insurance and financial services, as representatives work with their customers' savings, investments, and the protection of their assets.

As a registered representative, it is essential to know what can and cannot be discussed with customers, as well as how you must go about opening accounts, making recommendations, keeping and maintaining records, and other pertinent details.

The Financial Industry Regulatory Authority, which is also referred to as FINRA -pronounced fin rah -- offers a variety of different licenses that must be obtained by passing an examination before an advisor is allowed to conduct business. One of the most popular of these is the Series 6.

The official title of the Series 6 exam is the Investment Company and Variable Contracts Products Representative Qualification Examination. The examination is organized according to the critical job functions that are performed by a representative who has the Series 6 registration.

WHAT HAVING THE SERIES 6 WILL ALLOW YOU TO DO IN YOUR BUSINESS Passing the Series 6 exam can help to set you apart from a myriad of other insurance and financial professionals. According to FINRA, the Series 6 exam is designed for verifying that variable contracts product representatives and investment workers have a thorough understanding of the industry, and that they are competent in their duties.

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Those who successfully complete the Series 6 exam are qualified to solicit, purchase, and sell certain types of securities products. These include: •

Open-end mutual funds

•

Variable annuities

•

Variable life insurance

•

Unit Investment Trusts

•

Municipal fund securities

It is important to note, though, that in order to conduct business in any insurance or annuity products, representatives must also pass a state life insurance exam.

HOW THE SERIES 6 EXAM IS ORGANIZED Prior to sitting for the Series 6 examination, it can be helpful to know how the test is organized, as well as what will be expected of you, and what is required in order for you to successfully pass the exam.

There are currently 100 questions on the Series 6 exam, and it requires a grade of at least 70 percent to pass. These questions will include a focus on regulatory fundamentals and business development, evaluation of customers' financial information, identification of customers' investment objectives, providing information on investment products, and making suitable recommendations to customers and prospects.

There will also be questions on the exam with regard to opening, maintaining, and closing accounts, transferring accounts, retaining appropriate account records, and the verification and confirmation of customer purchase and sale instructions.

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WHAT TO EXPECT FROM THIS STUDY MATERIAL Why is it important that you use a Series 6 study guide?

There are actually several good reasons. First, just like with any other exam, it can be beneficial to study and review the information that may be included so that you are familiar with what may be asked.

Doing so will not just help you with preparing mentally for the Series 6 examination, but it can also help you to be more confident and relaxed physically when you are in the process of completing the test. And, that is what this study material will allow you to do.

This course will provide you with in-depth information on the primary components of the Series 6 exam. This includes details regarding the financial services regulatory environment, as well as product, account, and record maintenance requirements.

In Section One, The Financial Services Regulatory Environment, you will learn about the key rules and regulations that have set the stage for the industry in the early years, as well as more recent rules that you need to be aware of while you are conducting business.

In Section Two, What Makes for a Suitable Recommendation, you will learn about the Financial Industry Regulatory Authority's Suitability Rules. You will also learn how to more accurately evaluate client profiles. This can be beneficial in determining a client's risk tolerance, in turn, allowing you to better narrow down your recommendations for him or her.

Section Three is titled Understanding Fiduciary Responsibilities. In this section, there are several key elements that are covered, including Properly Evaluating Your Clients' Objectives, Creating Client Strategies that are Based on Risk Tolerance, Time Horizon, and Other Key Factors, and The Many Types of Financial Risk.

Because the market can be - and oftentimes is - volatile, it is essential to know how your clients feel regarding risk, and to then gear your product and service recommendations to appropriately match that.

In Section Four, Opening Client Accounts will be discussed. This section will provide you with more in-depth information regarding the types of customer account ownership, and about 3|Page

how to ensure that you remain within the financial industry guidelines when you are making recommendations to your clients. The constructing of suitable recommendations, and the proper execution orders, will also be covered in this section of the course.

Section Five provides information on Record Maintenance Requirements. Throughout the years, various rules have been enacted with regard to what information must be retained and maintained as it relates to customer communications. Not abiding by these rules can result in penalties and / or fines.

Once all of the key materials have been thoroughly covered in this guide, we will move on to Section Six, What to Expect Before, During, and After Taking the Series 6 Exam. In this section, you will learn about how to prepare for the Series 6 exam, both mentally and physically.

You will also learn various test-taking strategies so that you can narrow down the best answer, and so that you don't feel rushed, given the one hundred and thirty-five minutes in which you have to complete the exam.

Once you have taken and passed the Series 6 exam, there are some required forms that you will need to complete. These will be discussed in this section, as well as information regarding Series 6 ongoing continuing education requirements.

Each of the sections of this course contains short practice quizzes. The questions on these quizzes will help you to determine how much of the information you have retained. In addition, these multiple choice tests will also assist you in becoming better prepared for testtaking in general, and in narrowing down which of the possible answers that are provided is correct.

At the end of this course, there is a one hundred question final practice exam. Here, you will also be able to determine your retention of the information. In addition, you can get a better gauge of how long it may take you to answer one hundred questions so that you can match that against the two-and-one-half hours that you will be given for the actual Series 6 examination.

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So, let's move forward now into Section One, The Financial Services Regulatory Environment.

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SECTION 1: THE FINANCIAL SERVICES REGULATORY ENVIRONMENT Welcome to Section One, The Financial Services Regulatory Environment. In this section, you will learn about many of the agencies and rules that are in place for the purpose of regulating and overseeing the financial markets and companies, as well as for registered representatives.

Each agency and regulation has set duties and responsibilities that enable them to act independently of one another, while at the same time working together in order to accomplish similar objectives.

UNDERSTANDING THE FINANCIAL INDUSTRY REGULATORY AUTHORITY The Financial Industry Regulatory Authority -- also known simply as FINRA, which is pronounced as fin rah -- was created in 2007 from its predecessor, the National Association of Securities Dealers, which is also referred to as the NASD. FINRA is considered to be a self-regulatory entity. It was initially created as a result of the Securities Exchange Act of 1934. FINRA works to oversee all firms that are involved in the securities business and that deal with the public in making recommendations and offering various financial and insurance products. FINRA is registered with, and it is overseen by, the Securities and Exchange Commission. The Securities and Exchange Commission is oftentimes referred to simply as the S. E. C. In addition, FINRA is also responsible for the training of financial services professionals, as well as in the testing and the licensing of agents, and the overseeing of mediation and arbitration processes for disputes between brokers and customers.

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FINRA is dedicated to investor protection and market integrity through both efficient and effective regulation of broker dealers. It is important to note that FINRA is not part of the United States government.

FINRA is, however, a non-profit entity that is authorized by the United States Congress to protect America's investors by making sure that the broker dealer industry operates both fairly and honestly.

FINRA carriers out its operations in a number of different ways. These methods include writing and enforcing rules that govern the activities of the approximately three thousand, seven hundred broker dealer firms that operate in the United States. Through these firms, there are currently more than six hundred and thirty thousand brokers.

In addition to its other duties, FINRA also examines firms for compliance with industry rules, and it fosters transparency of the market, as well as educates investors. In fact, FINRA's regulation plays a critical role in America's financial system. FINRA regulates firms by enforcing high ethical standards, and by bringing the necessary resources and expertise to regulation. In addition, FINRA enhances investor safeguards and market integrity -- and it does all of this at no cost to United States taxpayers.

In its protection of investors, in just one year alone, FINRA brought more than fourteen hundred disciplinary actions against registered brokers and firms. The organization also levied nearly one hundred seventy seven million dollars in fines. Likewise, FINRA ordered nearly twenty eight million dollars in restitution to investors who were harmed in some way.

FINRA's technology is a vital component of the overall financial industry, and it is vital to protecting investors by effectively overseeing brokerage firms, and by accurately monitoring the U.S. equities markets. This technology is able to quickly detect potential fraud, and is able to keep investors informed through various tools like Broker Check.

Many of the rules that FINRA enforces had their beginnings nearly a century ago through various legislation. One such legislative act is the Securities Act of 1933.

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THE SECURITIES ACT OF 1933 In the next several sections, we will go over the key legislation that pertains to the securities industry. This begins with a discussion of the Securities Act of 1933.

After the stock market crashed back in 1929, and following the subsequent Great Depression in the United States in the 1930s, it was apparent to the federal government that securities regulations up to that point had been too lax. Prior to that time, for instance, the investing public had largely been kept in the dark with regard to how Wall Street really worked.

Because of that, starting in the year 1933, a series of securities acts were introduced.

These acts had the intent of providing a more fair playing field for better informed investors.

The Securities Act of 1933 legislation also had the goal of restoring the public's confidence in the operation of the securities exchanges.

The Securities Act of 1933 was the first major federal legislation to regulate the offer and sale of securities. Prior to this Act, the regulation of securities was primarily governed by state laws, which were commonly referred to as blue sky laws.

There are actually several names that the Securities Act of 1933 may be referred to.

These include: •

The 1933 Act

•

The Securities Act

•

The Truth in Securities Act

•

The Federal Securities Act

•

The 33 Act

The Securities Act of 1933 has two key objectives. These include: •

Requiring that investors receive financial and other significant information concerning securities that are being offered for sale, and

•

Prohibiting deceit, misrepresentations, and other fraud in the sale of securities.

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These goals were accomplished primarily via the disclosure of important financial information through the registration of securities. This information can enable investors -- not the government -- to make more informed decisions regarding whether or not to purchase a company's securities.

According to its own website, the Securities and Exchange Commission has as its primary mission "to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation."

Although the Securities and Exchange Commission requires that the information provided be accurate, though, it does not guarantee this. However, that being said, investors who purchase securities, and in turn end up suffering losses, have important recovery rights. In order to benefit from these rights, though, investors must be able to prove that there was incomplete or inaccurate disclosure of important information.

In order to better ensure that investors are able to obtain pertinent information about the securities they are considering, securities that are offered in the U.S. are required to be registered. The registration forms that companies file must provide essential facts, while at the same time minimizing the burden and the expense of complying with the law.

In general, the required securities registration forms call for some specific information, including: •

A description of the company's property and business,

•

A description of the security to be offered for sale,

•

Information about the management of the company, and

•

Financial statements that have been certified by independent accountants.

Such registration statements are subject to examination for compliance with disclosure requirements. Shortly after a company files its registration statements and prospectuses with the SEC, this information will become public.

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It is important to note that not all offerings of securities are required to be registered with the Securities and Exchange Commission. For example, some of the exceptions from the registration process include: •

Private offerings to a limited number of persons or institutions,

•

Offerings that are of a limited size,

•

Intrastate offerings, and

•

Securities of municipal, state, and federal governments.

THE SECURITIES EXCHANGE ACT OF 1934 In addition to the Securities Act of 1933, there is the Securities and Exchange Act of 1934. With the Securities and Exchange Act of 1934, the United States Congress created the Securities and Exchange Commission. This particular legislation empowers the Securities and Exchange Commission with broad authority over all aspects of the securities industry.

This authority includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies, as well as the country's securities self-regulatory organizations. The various securities exchanges, such as the New York Stock Exchange, the NASDAQ (naz-dack) Stock Market, and the Chicago Board of Options are all considered to be self-regulatory organizations. Likewise, FINRA is a self-regulatory organization, too.

The Securities Exchange Act of 1934 also identifies and prohibits certain types of conduct in the securities markets, and it provides the Securities and Exchange Commission with disciplinary powers over regulated entities and persons who are associated with them.

In addition, the Securities Exchange Act of 1934 also empowers the Securities and Exchange Commission to require periodic reporting of information by companies that have publicly traded securities.

As an example, companies that have more than $10 million in assets and whose securities are held by more than 500 owners are required to file annual, as well as other,

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periodic reports. These reports are then available for viewing by the public through the Securities and Exchange Commission's database.

On top of having the power to require reporting, the Securities and Exchange Commission also governs the disclosure in the materials that are used for soliciting shareholders' votes in annual or special meetings that are held for the election of directors and for the approval of other corporate action.

This information, which is contained in proxy materials, must be filed with the Securities and Exchange Commission in advance of any solicitation in order to ensure compliance with the disclosure rules.

Here, any solicitations -- regardless of whether by management or by shareholder groups -- are required to disclose all of the important facts concerning the issues on which shareholders are asked to vote.

The Securities and Exchange Commission also has involvement when it comes to anyone who seeks to acquire more than five percent of a company's securities by either a direct purchase or through a tender offer.

One reason for this is because oftentimes, such an offer is extended for the purpose of gaining control of the company. In this case, the Securities and Exchange Commission will require the disclosure of important information by the potential purchaser. In doing so, this can allow the current shareholders of the company to make informed decisions.

Another requirement of the Securities Exchange Act of 1934 is that various market participants register with the Securities and Exchange Commission. In doing so, disclosure statements must be filed, and these statements must also be updated on a regular basis.

In working to ensure a fair trading environment for all, securities laws strictly prohibit fraudulent activities of any kind in connection with the offer, the purchase, or the sale of securities.

These provisions are the basis for many types of disciplinary actions, which can include actions against fraudulent insider trading. This type of trading is considered to be illegal when a

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