Investment Company and Variable Contracts Products Principal Series 26
Exam Questions and Answers
Question 1. A Class A mutual fund has an NAV of $20.00 and a front-end sales charge equal to 5.75% of the public offering price. What
is the approximate public offering price?
A. $21.15
B. $21.22
C. $20.06
D. $18.91
Correct Answer: B. $21.22
Explanation: When the sales charge is stated as a percentage of the public offering price, POP equals NAV divided by one minus the
sales-charge percentage. Dividing $20.00 by 0.9425 produces a public offering price of approximately $21.22. Simply adding the stated
percentage to NAV treats the sales charge as a percentage of NAV and therefore uses the wrong base. This distinction is a common mutual fund
calculation because sales-load percentages are normally quoted relative to the offering price.
Question 2. An open-end fund has assets of $380,000,000, liabilities of $15,000,000, and 6,000,000 shares outstanding. What is the
fund's net asset value per share?
A. $60.83
B. $63.33
C. $65.83
D. $2.50
Correct Answer: A. $60.83
Explanation: Net asset value equals total fund assets minus liabilities, divided by shares outstanding. The fund's net assets are $365,000,000,
and dividing by 6,000,000 shares gives $60.83 per share. Using total assets without subtracting liabilities overstates the value available to
shareholders. For an open-end fund, this NAV is the basis for the next calculated purchase or redemption price, subject to any applicable sales
charge.
Question 3. Which term best matches the following description: risk-based governance and controls intended to protect customer
information, systems, credentials, and business operations from cyber threats?
A. Discretionary authority approval
B. Form U4 amendment
C. Outside business activity supervision
D. Cybersecurity supervision
Correct Answer: D. Cybersecurity supervision
Explanation: Cybersecurity supervision is the correct concept because it is risk-based governance and controls intended to protect customer
information, systems, credentials, and business operations from cyber threats. The wording in the question points to the defining feature rather
than to a merely associated idea. The other choices are legitimate exam concepts, but their definitions do not match the facts stated here.
Recognizing that defining feature is the most reliable way to identify Cybersecurity supervision.
Question 4. Which term best matches the following description: policies and controls designed to restrict the flow of material nonpublic
information between business units?
A. Outside business activity
B. Prospectus
C. Information barrier
D. Wash sale manipulation
Correct Answer: C. Information barrier
Explanation: Information barrier is the correct concept because it is policies and controls designed to restrict the flow of material nonpublic
information between business units. The wording in the question points to the defining feature rather than to a merely associated idea. The other
choices are legitimate exam concepts, but their definitions do not match the facts stated here. Recognizing that defining feature is the most
reliable way to identify Information barrier.
1
,Question 5. A long margin account has securities with a market value of $36,000 and a debit balance of $5,000. What is the account's
equity?
A. $5,000
B. $31,000
C. $41,000
D. $18,000
Correct Answer: B. $31,000
Explanation: Equity in a long margin account equals the market value of the securities minus the debit balance owed to the broker-dealer.
Subtracting $5,000 from $36,000 produces equity of $31,000. The debit balance itself is the customer's loan, not the customer's ownership
interest in the account. This equity amount is then compared with applicable maintenance requirements to determine whether additional margin
is needed.
Question 6. Which term best matches the following description: the rate used in the variable annuity payout calculation to determine how
annuity payments respond to actual separate-account performance?
A. Capital gains distribution
B. Mutual fund expense ratio
C. Annuitization
D. Assumed interest rate
Correct Answer: D. Assumed interest rate
Explanation: Assumed interest rate is the correct concept because it is the rate used in the variable annuity payout calculation to determine how
annuity payments respond to actual separate-account performance. The wording in the question points to the defining feature rather than to a
merely associated idea. The other choices are legitimate exam concepts, but their definitions do not match the facts stated here. Recognizing
that defining feature is the most reliable way to identify Assumed interest rate.
Question 7. Which statement about Variable annuity death benefit is most accurate?
A. Secondary-market pricing determined by supply and demand, allowing shares to trade above or below net asset value
B. An annuity payout option designed to continue payments while either of two covered annuitants remains alive
C. An insurance feature providing a death benefit according to the contract terms if the owner or annuitant dies before or during specified
phases
D. A mutual fund sale made just below a sales-charge breakpoint without a valid reason, potentially depriving the customer of a reduced sales
charge
Correct Answer: C. An insurance feature providing a death benefit according to the contract terms if the owner or annuitant dies before or
during specified phases
Explanation: Variable annuity death benefit is correctly described as an insurance feature providing a death benefit according to the contract
terms if the owner or annuitant dies before or during specified phases. That description captures the core characteristic tested by this item. The
remaining descriptions belong to different concepts and would lead to a different regulatory, product, accounting, or operational analysis. On
exam questions, match the term to its defining feature before considering secondary details.
Question 8. Which statement about Customer reserve review is most accurate?
A. Financial responsibility supervision designed to ensure required customer protection computations, segregation, and possession or control
obligations are met
B. A location identified under applicable FINRA definitions where one or more associated persons regularly conduct securities business,
subject to specified exclusions
C. Heightened product governance and sales-practice controls for investments whose features or risks may be difficult for retail investors to
understand
D. Periodic independent testing of the effectiveness of a broker-dealer's AML program by qualified personnel
Correct Answer: A. Financial responsibility supervision designed to ensure required customer protection computations, segregation, and
possession or control obligations are met
Explanation: Customer reserve review is correctly described as financial responsibility supervision designed to ensure required customer
protection computations, segregation, and possession or control obligations are met. That description captures the core characteristic tested by
this item. The remaining descriptions belong to different concepts and would lead to a different regulatory, product, accounting, or operational
analysis. On exam questions, match the term to its defining feature before considering secondary details.
2
,Question 9. Which choice correctly distinguishes Supervisory control system from Annual compliance certification?
A. Supervisory control system: a principal-level certification process concerning the firm's processes for establishing, maintaining, reviewing,
testing, and modifying compliance policies and supervisory procedures; Annual compliance certification: a system of controls designed to
test and verify that supervisory procedures are reasonably designed and functioning effectively
B. Supervisory control system: controls designed to ensure reportable trades are submitted accurately and within applicable time
requirements; Annual compliance certification: a principal-level certification process concerning the firm's processes for establishing,
maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures
C. Supervisory control system: a system of controls designed to test and verify that supervisory procedures are reasonably designed and
functioning effectively; Annual compliance certification: a principal-level certification process concerning the firm's processes for
establishing, maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures
D. Supervisory control system: a system of controls designed to test and verify that supervisory procedures are reasonably designed and
functioning effectively; Annual compliance certification: a firm list identifying securities in which trading or other activity is restricted because
of legal, regulatory, or conflict concerns
Correct Answer: C. Supervisory control system: a system of controls designed to test and verify that supervisory procedures are reasonably
designed and functioning effectively; Annual compliance certification: a principal-level certification process concerning the firm's processes for
establishing, maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures
Explanation: Supervisory control system means a system of controls designed to test and verify that supervisory procedures are reasonably
designed and functioning effectively, whereas Annual compliance certification means a principal-level certification process concerning the firm's
processes for establishing, maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures. The correct choice
keeps the two concepts separate and assigns each description to the proper term. The distractors either reverse the concepts or substitute a
feature belonging to another topic. That distinction matters because the two terms can lead to different regulatory, economic, or operational
consequences.
Question 10. Which statement about BrokerCheck is most accurate?
A. FINRA's public system for researching registration and disclosure information about brokerage firms and securities professionals
B. A securities transaction outside an associated person's regular employment that may require prior written notice and firm approval or
supervision
C. Trading while in possession of material nonpublic information in breach of a duty or other applicable legal prohibition
D. A compensated or business-related activity away from the member firm that is subject to applicable notice and supervisory requirements
Correct Answer: A. FINRA's public system for researching registration and disclosure information about brokerage firms and securities
professionals
Explanation: BrokerCheck is correctly described as FINRA's public system for researching registration and disclosure information about
brokerage firms and securities professionals. That description captures the core characteristic tested by this item. The remaining descriptions
belong to different concepts and would lead to a different regulatory, product, accounting, or operational analysis. On exam questions, match the
term to its defining feature before considering secondary details.
Question 11. Which term best matches the following description: a clearing agency providing comparison, netting, risk management, and
settlement services for many broker-dealer transactions?
A. Stock loan
B. Cash dividend
C. Transfer initiation form
D. National Securities Clearing Corporation
Correct Answer: D. National Securities Clearing Corporation
Explanation: National Securities Clearing Corporation is the correct concept because it is a clearing agency providing comparison, netting, risk
management, and settlement services for many broker-dealer transactions. The wording in the question points to the defining feature rather than
to a merely associated idea. The other choices are legitimate exam concepts, but their definitions do not match the facts stated here.
Recognizing that defining feature is the most reliable way to identify National Securities Clearing Corporation.
3
, Question 12. A investment company and variable contracts products principal is reviewing a situation described as follows: a
broker-dealer's documented system describing supervisory responsibilities, review processes, escalation, and controls designed to
achieve compliance with applicable laws and rules. Which concept is most directly involved?
A. Market access controls
B. Written supervisory procedures
C. Restricted list
D. Trade reporting supervision
Correct Answer: B. Written supervisory procedures
Explanation: Written supervisory procedures is the best answer because it is a broker-dealer's documented system describing supervisory
responsibilities, review processes, escalation, and controls designed to achieve compliance with applicable laws and rules. The scenario gives
the investment company and variable contracts products principal facts that point directly to that concept. The other choices can arise in related
securities situations but do not fit the specific description provided. Applying the precise definition to the facts is the best way to resolve this type
of scenario.
Question 13. Which choice correctly distinguishes Separate-account prospectus from Contingent deferred sales charge?
A. Separate-account prospectus: the disclosure document describing investment options, charges, risks, and other material terms of a
variable insurance product; Contingent deferred sales charge: a sales charge that may be imposed when specified fund or annuity assets
are redeemed within a stated period
B. Separate-account prospectus: a sales charge that may be imposed when specified fund or annuity assets are redeemed within a stated
period; Contingent deferred sales charge: the disclosure document describing investment options, charges, risks, and other material terms
of a variable insurance product
C. Separate-account prospectus: permanent life insurance generally providing fixed premiums, a stated death benefit, and cash value
guarantees subject to the policy; Contingent deferred sales charge: a sales charge that may be imposed when specified fund or annuity
assets are redeemed within a stated period
D. Separate-account prospectus: the disclosure document describing investment options, charges, risks, and other material terms of a
variable insurance product; Contingent deferred sales charge: a distribution by a regulated investment company of realized net capital gains
to shareholders
Correct Answer: A. Separate-account prospectus: the disclosure document describing investment options, charges, risks, and other material
terms of a variable insurance product; Contingent deferred sales charge: a sales charge that may be imposed when specified fund or annuity
assets are redeemed within a stated period
Explanation: Separate-account prospectus means the disclosure document describing investment options, charges, risks, and other material
terms of a variable insurance product, whereas Contingent deferred sales charge means a sales charge that may be imposed when specified
fund or annuity assets are redeemed within a stated period. The correct choice keeps the two concepts separate and assigns each description to
the proper term. The distractors either reverse the concepts or substitute a feature belonging to another topic. That distinction matters because
the two terms can lead to different regulatory, economic, or operational consequences.
Question 14. Which concept-and-description pairing is correctly matched?
A. Annual report filing - written procedures designed to address significant business disruptions and preserve critical operations and customer
access
B. Senior investor protection - supervisory measures addressing risks such as diminished capacity, financial exploitation, unusual
disbursements, and trusted contact information
C. AML compliance person - a firm list identifying securities in which trading or other activity is restricted because of legal, regulatory, or
conflict concerns
D. New product review - a FINRA communication distributed or made available to more than 25 retail investors within a 30-calendar-day
period
Correct Answer: B. Senior investor protection - supervisory measures addressing risks such as diminished capacity, financial exploitation,
unusual disbursements, and trusted contact information
Explanation: Only the pairing for Senior investor protection is accurate: it is supervisory measures addressing risks such as diminished capacity,
financial exploitation, unusual disbursements, and trusted contact information. Each incorrect choice attaches a valid-sounding description to the
wrong concept. Because the distractors are drawn from related exam material, they can appear plausible unless both parts of the pairing are
checked. Verify the term and its defining feature together before selecting a matched pair.
4
Exam Questions and Answers
Question 1. A Class A mutual fund has an NAV of $20.00 and a front-end sales charge equal to 5.75% of the public offering price. What
is the approximate public offering price?
A. $21.15
B. $21.22
C. $20.06
D. $18.91
Correct Answer: B. $21.22
Explanation: When the sales charge is stated as a percentage of the public offering price, POP equals NAV divided by one minus the
sales-charge percentage. Dividing $20.00 by 0.9425 produces a public offering price of approximately $21.22. Simply adding the stated
percentage to NAV treats the sales charge as a percentage of NAV and therefore uses the wrong base. This distinction is a common mutual fund
calculation because sales-load percentages are normally quoted relative to the offering price.
Question 2. An open-end fund has assets of $380,000,000, liabilities of $15,000,000, and 6,000,000 shares outstanding. What is the
fund's net asset value per share?
A. $60.83
B. $63.33
C. $65.83
D. $2.50
Correct Answer: A. $60.83
Explanation: Net asset value equals total fund assets minus liabilities, divided by shares outstanding. The fund's net assets are $365,000,000,
and dividing by 6,000,000 shares gives $60.83 per share. Using total assets without subtracting liabilities overstates the value available to
shareholders. For an open-end fund, this NAV is the basis for the next calculated purchase or redemption price, subject to any applicable sales
charge.
Question 3. Which term best matches the following description: risk-based governance and controls intended to protect customer
information, systems, credentials, and business operations from cyber threats?
A. Discretionary authority approval
B. Form U4 amendment
C. Outside business activity supervision
D. Cybersecurity supervision
Correct Answer: D. Cybersecurity supervision
Explanation: Cybersecurity supervision is the correct concept because it is risk-based governance and controls intended to protect customer
information, systems, credentials, and business operations from cyber threats. The wording in the question points to the defining feature rather
than to a merely associated idea. The other choices are legitimate exam concepts, but their definitions do not match the facts stated here.
Recognizing that defining feature is the most reliable way to identify Cybersecurity supervision.
Question 4. Which term best matches the following description: policies and controls designed to restrict the flow of material nonpublic
information between business units?
A. Outside business activity
B. Prospectus
C. Information barrier
D. Wash sale manipulation
Correct Answer: C. Information barrier
Explanation: Information barrier is the correct concept because it is policies and controls designed to restrict the flow of material nonpublic
information between business units. The wording in the question points to the defining feature rather than to a merely associated idea. The other
choices are legitimate exam concepts, but their definitions do not match the facts stated here. Recognizing that defining feature is the most
reliable way to identify Information barrier.
1
,Question 5. A long margin account has securities with a market value of $36,000 and a debit balance of $5,000. What is the account's
equity?
A. $5,000
B. $31,000
C. $41,000
D. $18,000
Correct Answer: B. $31,000
Explanation: Equity in a long margin account equals the market value of the securities minus the debit balance owed to the broker-dealer.
Subtracting $5,000 from $36,000 produces equity of $31,000. The debit balance itself is the customer's loan, not the customer's ownership
interest in the account. This equity amount is then compared with applicable maintenance requirements to determine whether additional margin
is needed.
Question 6. Which term best matches the following description: the rate used in the variable annuity payout calculation to determine how
annuity payments respond to actual separate-account performance?
A. Capital gains distribution
B. Mutual fund expense ratio
C. Annuitization
D. Assumed interest rate
Correct Answer: D. Assumed interest rate
Explanation: Assumed interest rate is the correct concept because it is the rate used in the variable annuity payout calculation to determine how
annuity payments respond to actual separate-account performance. The wording in the question points to the defining feature rather than to a
merely associated idea. The other choices are legitimate exam concepts, but their definitions do not match the facts stated here. Recognizing
that defining feature is the most reliable way to identify Assumed interest rate.
Question 7. Which statement about Variable annuity death benefit is most accurate?
A. Secondary-market pricing determined by supply and demand, allowing shares to trade above or below net asset value
B. An annuity payout option designed to continue payments while either of two covered annuitants remains alive
C. An insurance feature providing a death benefit according to the contract terms if the owner or annuitant dies before or during specified
phases
D. A mutual fund sale made just below a sales-charge breakpoint without a valid reason, potentially depriving the customer of a reduced sales
charge
Correct Answer: C. An insurance feature providing a death benefit according to the contract terms if the owner or annuitant dies before or
during specified phases
Explanation: Variable annuity death benefit is correctly described as an insurance feature providing a death benefit according to the contract
terms if the owner or annuitant dies before or during specified phases. That description captures the core characteristic tested by this item. The
remaining descriptions belong to different concepts and would lead to a different regulatory, product, accounting, or operational analysis. On
exam questions, match the term to its defining feature before considering secondary details.
Question 8. Which statement about Customer reserve review is most accurate?
A. Financial responsibility supervision designed to ensure required customer protection computations, segregation, and possession or control
obligations are met
B. A location identified under applicable FINRA definitions where one or more associated persons regularly conduct securities business,
subject to specified exclusions
C. Heightened product governance and sales-practice controls for investments whose features or risks may be difficult for retail investors to
understand
D. Periodic independent testing of the effectiveness of a broker-dealer's AML program by qualified personnel
Correct Answer: A. Financial responsibility supervision designed to ensure required customer protection computations, segregation, and
possession or control obligations are met
Explanation: Customer reserve review is correctly described as financial responsibility supervision designed to ensure required customer
protection computations, segregation, and possession or control obligations are met. That description captures the core characteristic tested by
this item. The remaining descriptions belong to different concepts and would lead to a different regulatory, product, accounting, or operational
analysis. On exam questions, match the term to its defining feature before considering secondary details.
2
,Question 9. Which choice correctly distinguishes Supervisory control system from Annual compliance certification?
A. Supervisory control system: a principal-level certification process concerning the firm's processes for establishing, maintaining, reviewing,
testing, and modifying compliance policies and supervisory procedures; Annual compliance certification: a system of controls designed to
test and verify that supervisory procedures are reasonably designed and functioning effectively
B. Supervisory control system: controls designed to ensure reportable trades are submitted accurately and within applicable time
requirements; Annual compliance certification: a principal-level certification process concerning the firm's processes for establishing,
maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures
C. Supervisory control system: a system of controls designed to test and verify that supervisory procedures are reasonably designed and
functioning effectively; Annual compliance certification: a principal-level certification process concerning the firm's processes for
establishing, maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures
D. Supervisory control system: a system of controls designed to test and verify that supervisory procedures are reasonably designed and
functioning effectively; Annual compliance certification: a firm list identifying securities in which trading or other activity is restricted because
of legal, regulatory, or conflict concerns
Correct Answer: C. Supervisory control system: a system of controls designed to test and verify that supervisory procedures are reasonably
designed and functioning effectively; Annual compliance certification: a principal-level certification process concerning the firm's processes for
establishing, maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures
Explanation: Supervisory control system means a system of controls designed to test and verify that supervisory procedures are reasonably
designed and functioning effectively, whereas Annual compliance certification means a principal-level certification process concerning the firm's
processes for establishing, maintaining, reviewing, testing, and modifying compliance policies and supervisory procedures. The correct choice
keeps the two concepts separate and assigns each description to the proper term. The distractors either reverse the concepts or substitute a
feature belonging to another topic. That distinction matters because the two terms can lead to different regulatory, economic, or operational
consequences.
Question 10. Which statement about BrokerCheck is most accurate?
A. FINRA's public system for researching registration and disclosure information about brokerage firms and securities professionals
B. A securities transaction outside an associated person's regular employment that may require prior written notice and firm approval or
supervision
C. Trading while in possession of material nonpublic information in breach of a duty or other applicable legal prohibition
D. A compensated or business-related activity away from the member firm that is subject to applicable notice and supervisory requirements
Correct Answer: A. FINRA's public system for researching registration and disclosure information about brokerage firms and securities
professionals
Explanation: BrokerCheck is correctly described as FINRA's public system for researching registration and disclosure information about
brokerage firms and securities professionals. That description captures the core characteristic tested by this item. The remaining descriptions
belong to different concepts and would lead to a different regulatory, product, accounting, or operational analysis. On exam questions, match the
term to its defining feature before considering secondary details.
Question 11. Which term best matches the following description: a clearing agency providing comparison, netting, risk management, and
settlement services for many broker-dealer transactions?
A. Stock loan
B. Cash dividend
C. Transfer initiation form
D. National Securities Clearing Corporation
Correct Answer: D. National Securities Clearing Corporation
Explanation: National Securities Clearing Corporation is the correct concept because it is a clearing agency providing comparison, netting, risk
management, and settlement services for many broker-dealer transactions. The wording in the question points to the defining feature rather than
to a merely associated idea. The other choices are legitimate exam concepts, but their definitions do not match the facts stated here.
Recognizing that defining feature is the most reliable way to identify National Securities Clearing Corporation.
3
, Question 12. A investment company and variable contracts products principal is reviewing a situation described as follows: a
broker-dealer's documented system describing supervisory responsibilities, review processes, escalation, and controls designed to
achieve compliance with applicable laws and rules. Which concept is most directly involved?
A. Market access controls
B. Written supervisory procedures
C. Restricted list
D. Trade reporting supervision
Correct Answer: B. Written supervisory procedures
Explanation: Written supervisory procedures is the best answer because it is a broker-dealer's documented system describing supervisory
responsibilities, review processes, escalation, and controls designed to achieve compliance with applicable laws and rules. The scenario gives
the investment company and variable contracts products principal facts that point directly to that concept. The other choices can arise in related
securities situations but do not fit the specific description provided. Applying the precise definition to the facts is the best way to resolve this type
of scenario.
Question 13. Which choice correctly distinguishes Separate-account prospectus from Contingent deferred sales charge?
A. Separate-account prospectus: the disclosure document describing investment options, charges, risks, and other material terms of a
variable insurance product; Contingent deferred sales charge: a sales charge that may be imposed when specified fund or annuity assets
are redeemed within a stated period
B. Separate-account prospectus: a sales charge that may be imposed when specified fund or annuity assets are redeemed within a stated
period; Contingent deferred sales charge: the disclosure document describing investment options, charges, risks, and other material terms
of a variable insurance product
C. Separate-account prospectus: permanent life insurance generally providing fixed premiums, a stated death benefit, and cash value
guarantees subject to the policy; Contingent deferred sales charge: a sales charge that may be imposed when specified fund or annuity
assets are redeemed within a stated period
D. Separate-account prospectus: the disclosure document describing investment options, charges, risks, and other material terms of a
variable insurance product; Contingent deferred sales charge: a distribution by a regulated investment company of realized net capital gains
to shareholders
Correct Answer: A. Separate-account prospectus: the disclosure document describing investment options, charges, risks, and other material
terms of a variable insurance product; Contingent deferred sales charge: a sales charge that may be imposed when specified fund or annuity
assets are redeemed within a stated period
Explanation: Separate-account prospectus means the disclosure document describing investment options, charges, risks, and other material
terms of a variable insurance product, whereas Contingent deferred sales charge means a sales charge that may be imposed when specified
fund or annuity assets are redeemed within a stated period. The correct choice keeps the two concepts separate and assigns each description to
the proper term. The distractors either reverse the concepts or substitute a feature belonging to another topic. That distinction matters because
the two terms can lead to different regulatory, economic, or operational consequences.
Question 14. Which concept-and-description pairing is correctly matched?
A. Annual report filing - written procedures designed to address significant business disruptions and preserve critical operations and customer
access
B. Senior investor protection - supervisory measures addressing risks such as diminished capacity, financial exploitation, unusual
disbursements, and trusted contact information
C. AML compliance person - a firm list identifying securities in which trading or other activity is restricted because of legal, regulatory, or
conflict concerns
D. New product review - a FINRA communication distributed or made available to more than 25 retail investors within a 30-calendar-day
period
Correct Answer: B. Senior investor protection - supervisory measures addressing risks such as diminished capacity, financial exploitation,
unusual disbursements, and trusted contact information
Explanation: Only the pairing for Senior investor protection is accurate: it is supervisory measures addressing risks such as diminished capacity,
financial exploitation, unusual disbursements, and trusted contact information. Each incorrect choice attaches a valid-sounding description to the
wrong concept. Because the distractors are drawn from related exam material, they can appear plausible unless both parts of the pairing are
checked. Verify the term and its defining feature together before selecting a matched pair.
4
