Investment Company/Variable Contracts Products Representative Examination

FINRA classifies communications into three categories. Retail communications are written or electronic communications distributed to more than 25 retail investors within a 30-day period and generally require principal pre-approval. Correspondence is sent to 25 or fewer retail investors and requires supervision but not necessarily pre-approval.

Institutional communications are directed exclusively to institutional investors and require supervision but not pre-approval. All communications must be fair, balanced, and not misleading. They must include adequate risk disclosures, cannot predict future performance, and must clearly identify the member firm. New member firms must have a registered principal review and approve all retail communications for one year before use.

The National Do-Not-Call Registry prohibits firms from calling individuals who have registered their numbers. Firms must also maintain their own internal do-not-call lists. Exceptions exist for existing business relationships (within 18 months of the last transaction or 3 months of an inquiry) and express written consent.

Cold calls are permitted only between 8:00 AM and 9:00 PM in the recipient's time zone. Callers must identify themselves, their firm, the purpose of the call, and provide a phone number or address. Firms must maintain their do-not-call procedures in writing, train personnel, and update their lists regularly.

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts established for the benefit of a minor. An adult custodian manages the account until the minor reaches the age of majority (18 for UGMA, up to 25 for UTMA depending on the state).

Key rules: only one custodian and one minor per account, gifts are irrevocable once made, the minor's Social Security number is used (income is taxed at the minor's rate, subject to the "kiddie tax" rules), no margin trading or speculative strategies are allowed, and the custodian has a fiduciary responsibility to manage assets prudently. UTMA accounts can hold a broader range of assets than UGMA, including real estate.

Under the USA PATRIOT Act, every financial institution must implement a Customer Identification Program (CIP) to verify the identity of each person opening an account. At minimum, the firm must collect the customer's name, date of birth, address, and an identification number (Social Security number for U.S. persons, passport or other government-issued ID for non-U.S. persons).

The firm must verify this information within a reasonable time, maintain records of the verification for five years after the account is closed, and check the customer's name against government lists of known or suspected terrorists (OFAC lists). The CIP requirements apply to all accounts, including mutual fund and variable contract accounts opened through Series 6 representatives.

Class A shares charge a front-end sales load (paid at the time of purchase, typically 3-6%) and have lower ongoing 12b-1 fees. They offer breakpoint discounts for larger investments and are generally best for long-term investors making substantial investments. A letter of intent (LOI) allows investors to receive breakpoint pricing by pledging to invest a certain amount over 13 months.

Class B shares have no front-end load but charge a contingent deferred sales charge (CDSC) if redeemed within a specified period (typically 5-7 years) and carry higher 12b-1 fees. They typically convert to Class A shares after the CDSC period. Class C shares have no front-end load, a small CDSC (usually 1% if redeemed within one year), and higher ongoing 12b-1 fees that do not decrease over time. Class C shares are generally suitable for shorter holding periods.

Variable annuities have two phases. During the accumulation phase, the owner makes contributions that grow tax-deferred in subaccounts (similar to mutual funds within a separate account). The investment risk is borne by the contract owner, not the insurance company. No taxes are due on gains until withdrawal.

During the annuity (payout) phase, the owner receives periodic payments. Earnings are taxed as ordinary income (not capital gains) on a LIFO (last-in, first-out) basis for non-qualified annuities -- meaning earnings come out first and are fully taxable. Withdrawals before age 59 1/2 are subject to a 10% IRS early withdrawal penalty on the earnings portion. A 1035 exchange allows tax-free transfer from one annuity to another or from a life insurance policy to an annuity.

Forward pricing means that mutual fund orders are executed at the next calculated NAV after the order is received. NAV is calculated once per business day, typically at 4:00 PM ET. Orders received before the cutoff time receive that day's NAV; orders received after receive the next business day's NAV.

Net Asset Value (NAV) is calculated as: (Total Fund Assets - Total Fund Liabilities) / Number of Outstanding Shares. For Class A shares with a front-end load, the Public Offering Price (POP) is higher than NAV: POP = NAV / (1 - Sales Charge %). For example, if NAV is $10 and the sales charge is 5%, the POP = $10 / 0.95 = $10.53. Redemptions are always processed at NAV.

Variable annuity contracts include a free-look period (typically 10 days, though some states require longer) during which the contract owner may return the contract for a full refund without any surrender charges. This provides consumer protection by allowing time to review the contract after purchase.

Surrender charges (also called contingent deferred sales charges for annuities) apply when the owner withdraws funds or surrenders the contract during the surrender period (typically 5-8 years). The charges usually decrease over time on a declining schedule -- for example, 7% in year one, 6% in year two, decreasing to 0% after year seven. Many contracts allow annual penalty-free withdrawals of up to 10% of the account value.