Packaged Products (Mutual Funds, Annuities, UITs, ETFs) — Series 7 FINRA practice questions

A DPP (Direct Participation Program) is typically:

1. A federally insured deposit product
2. A publicly traded corporation subject to corp tax
3. An exchange-listed exchange-traded index fund
4. A pass-through vehicle passing income and losses

Answer: D — A pass-through vehicle passing income and losses

A) DPPs are not deposits and not insured. B) DPPs avoid corporate-level tax by pass-through. C) DPPs are typically illiquid, not exchange-listed. D) Correct — DPPs pass income and losses directly to investors.

Compared to open-end mutual funds, closed-end funds:

1. Redeem shares directly at NAV each business day
2. Reset the market price to NAV daily at each close
3. Continuously issue new shares to meet all demand
4. Have a fixed share count trading on an exchange

Answer: D — Have a fixed share count trading on an exchange

A) That describes open-end funds. B) NAV is not enforced on price for CEFs. C) That's open-end continuous offering. D) Correct — CEFs have a fixed share count and trade like stocks.

Which corporate action does NOT require shareholder approval?

1. A 2-for-1 forward stock split announcement
2. Amending the corporate charter documents
3. A merger with another public company
4. Issuance of new preferred stock class

Answer: A — A 2-for-1 forward stock split announcement

A) Correct — a forward split is a board-level decision without shareholder vote. B) Charter changes require shareholder approval. C) Mergers require shareholder approval. D) New share classes typically require charter amendment.

An ETF differs from a mutual fund primarily in that an ETF:

1. Prices only at end of day at NAV
2. Trades intraday on exchange at market prices
3. Has no expense ratio for any share class
4. Is limited to institutional buyers by SEC rule

Answer: B — Trades intraday on exchange at market prices

A) That describes an open-end mutual fund. B) Correct — ETFs trade throughout the day like stocks at market-driven prices. C) ETFs do carry expense ratios (usually low). D) ETFs are available to retail investors.

A Unit Investment Trust (UIT) has:

1. An actively managed rotating portfolio always
2. Perpetual life with no defined termination date
3. A closed-end exchange-listed structure only
4. A fixed portfolio and defined termination

Answer: D — A fixed portfolio and defined termination

A) UITs are not actively managed. B) UITs have a fixed termination date. C) UITs are typically redeemable, not exchange-listed CEFs. D) Correct — fixed portfolio, defined termination, redeemable units.

A letter of intent for mutual fund breakpoints is typically valid for:

1. Thirteen calendar months
2. Thirty calendar days
3. Thirty-six calendar months
4. Perpetual validity period

Answer: A — Thirteen calendar months

A) Correct — 13-month LOI standard. B) 30 days is too short. C) 36 months is too long. D) LOIs expire, not perpetual.

A Unit Investment Trust (UIT) has:

1. An actively managed rotating portfolio at all times
2. Perpetual life without any termination date fixed
3. Only exchange-listed closed-end structure form used
4. A fixed portfolio and defined termination date set

Answer: D — A fixed portfolio and defined termination date set

A) UITs are not actively managed. B) UITs have a defined termination. C) UITs are typically redeemable, not CEF. D) Correct — fixed portfolio, defined termination, redeemable units.

Under FINRA rules, a mutual fund may NOT be marketed as 'no-load' if it charges:

1. 12b-1 fees exceeding 0.25% per year and no CDSC
2. A front-end sales charge only of up to 3.5% max
3. A short-term redemption fee within 60 days of purchase
4. An annual custody fee on the account balance amount

Answer: A — 12b-1 fees exceeding 0.25% per year and no CDSC

A) Correct — 12b-1 above 0.25% disqualifies the 'no-load' label. B) A front load automatically disqualifies. C) Short-term redemption fees are permitted with 'no-load' label. D) Custody fees are separate from load status.

A mutual fund purchase order received at 2:00 p.m., before the fund's 4:00 p.m. pricing cutoff, will be executed at:

1. The price quoted at the time the order was placed
2. The prior day's closing NAV
3. The NAV next calculated after the order is received
4. A price negotiated between the fund and the investor

Answer: C — The NAV next calculated after the order is received

C) Correct — forward pricing means the order executes at the next NAV calculated after receipt. A) Funds don't quote a live tradable price like a stock. B) Using the prior day's NAV would violate forward pricing. D) NAV isn't negotiated; it's calculated mechanically.

65-year-old retiree on fixed Social Security wants a VA with 8-year surrender. Rep should:

1. Recommend it for tax-deferred growth potential
2. Recommend it if the retiree signs a disclosure
3. Refuse it: illiquidity conflicts with income needs
4. Recommend it regardless of age or liquidity picture

Answer: C — Refuse it: illiquidity conflicts with income needs

A) Tax deferral does not override liquidity mismatch. B) Signed disclosures don't cure unsuitability. C) Correct — surrender charges and illiquidity conflict with fixed-income retiree needs. D) Reg BI requires suitability regardless of disclosure.

What is a surrender period?

Period during which annuity withdrawals incur a surrender charge, typically 5-10 years, decreasing over time.

What is an inverse ETF?

An ETF designed to profit from a decline in its benchmark index using derivatives. Used for hedging or speculation.

What is a commodity ETF?

An ETF that tracks commodity prices (gold, oil, agriculture) using futures contracts or physical holdings. Subject to unique tax treatment (K-1 forms in some cases).

What is a breakpoint?

A volume discount on sales charges when purchases reach certain dollar amounts. Failure to disclose breakpoints is a violation.