Series 6 Exam Questions & Answers (SIA Instructor Verified)

As you say, unlike the prospectus/summary prospectus, the Statement of Additional Information shows the fund’s income statement and its balance sheet. An open-end fund is a large portfolio of securities. Bonds generate regular interest payments to the fund. Many common stocks generate regular dividend payments.  That represents the portfolio’s gross income. Next, operating expenses are deducted: management fee, transfer agent fees, custodial fees, etc. What is left is the net investment income, and most of this is distributed as dividend payments to the shareholders on a schedule established by the Board of Directors. The balance sheet shows the assets of the fund—the portfolio securities. Against that, the fund may have some liabilities—perhaps they borrow money to pay out redemptions to shareholders. The difference between the assets and liabilities equals the net assets of the fund.

Open-end and closed-end bond funds are large bond portfolios managed by a registered investment adviser. Investors buy shares of common stock in that bond portfolio. On a regular schedule, shareholders receive the net income derived from bond interest as income dividends. Once a year, shareholders receive their share of any capital gains realized through the trading of the portfolio by the investment adviser. Closed-end funds typically use leverage, so even within their equity portfolios they frequently issue senior securities in the form of preferred stock and, even, bonds. Open-end funds do not issue debt securities to their investors.

All withdrawals from a Traditional IRA are taxable as ordinary income. The reference to age 59 ½ has to do with the 10% early withdrawal penalty. If withdrawing funds before age 59 ½, IRA owners pay a 10% penalty on top of the ordinary income tax due on the withdrawal. So, for example, a withdrawal of $20,000 would involve a $2,000 penalty plus taxes on $20,000 of income, which could easily be anywhere between $5,000 and $8,000.

After settling with the IRS, the individual might be left with just over half the amount withdrawn, an extremely inefficient movement of funds that also leaves the account owner less prepared for retirement.

However, the following are qualifying exemptions to the 10% penalty. Although the withdrawal is taxable, the 10% penalty is waived for withdrawals before age 59 ½ made pursuant to the following:

• Death
• Permanent disability
• First home purchase for residential purposes
• A series of substantially equal periodic payments under IRS Rule 72-t
• Medical expenses
• Higher education expenses 

A withdrawal pursuant to death means the IRA owner has died before reaching age 59 ½, and someone else is receiving the account balance as a named beneficiary. In this case, the beneficiary will be taxed but will not be penalized. Unlike a taxable account, which may or may not name a beneficiary, IRAs and other retirement accounts are presumed to name one or more beneficiaries.

Shares of closed-end funds do trade throughout the day, but the buying/selling interest determines the market price for the shares, not their NAV. Open-end and closed-end funds calculate the NAV at the end of the trading session. For both, the NAV is the difference between the fund assets and liabilities, divided by the outstanding shares. For open-end funds, shares are then redeemed at that price or sold at a price based on the NAV. For closed-end funds, the market price for the shares could be above or below that NAV during a trading session. Or, it could trade for exactly the NAV.

We approach things as if suitability/investment recommendations will be an important part of the exam. As a registered representative, a Series 6 licensee explains investment options to customers and helps them determine suitability. Broker-dealers provide training, of course, but the license exam wants to see if candidates are able to rule out poor investment options in favor of more suitable approaches. Some questions on the exam involve basic math. Some involve remembering what a particular term or securities law is associated with. But, as you correctly state, suitability questions seem inherently unfamiliar and confusing. Then again, it’s a multiple choice exam. Therefore, the only way a suitability question can work is if three of the answer choices are eliminated by the facts presented in the question. There cannot be one or two “pretty good” answers and then one “really good” one. Rather, three of the answer choices are to be eliminated based on the information provided. For example, if the question says the recent retiree already has a defined benefit pension plan, you can probably eliminate redundant investments such as money market mutual funds or Treasury notes. If the question says the investor is concerned about inflation, that is a signal that common stock is a requirement, for at least a percentage of the portfolio. If there is no mention of the investor’s tax bracket, the option containing municipal bonds can probably be eliminated. Once you find fault with three of the answer choices, you are left with the correct answer. Suitability questions—and many others on the exam—must be solved carefully as opposed to answered through memorization or simple arithmetic.

Form U4 requires the applicant to disclose any felony charge and any felony conviction regardless of the date of occurrence. The form also requires disclosure of misdemeanors related to the securities business, e.g., theft, perjury, counterfeiting, forgery, and fraud, etc. Assuming the DUI conviction was a misdemeanor, you not only can take the exam and/or get licensed, but also you will not be required to disclose it via Form U4. It is a misdemeanor that does not relate to a financial services career.

There are two ways capital gains come into play for mutual funds. If the investment adviser realizes more gains than losses by trading portfolio securities, the fund realizes a net capital gain for the year. They can either distribute this to the shareholders or not. Either way, investors are taxed on their proportional share of this capital gains distribution. No matter how recently they bought into the fund, all investors are taxed at their long-term capital gains rate. The holding period is based on the mutual fund’s holding period, not the shareholders of the fund. The other way capital gains come into play is when the shareholder sells/redeems shares. If the holding period is at least 12 months plus 1 day, the gains/losses are long-term. If not, they are short-term.

Some open-end funds impose a sales charge when the investor purchases shares. For example, an investment of $10,000 in a small-cap growth fund might involve a sales charge of 5%, or $500, meaning that only $9,500 is invested, with the rest going to the distributor of the fund and members of the sales network. Some funds charge a redemption fee if shares are sold back to the fund within a stated time frame—maybe 18 months.

These fees are charged one-time only and depend on the decisions of the individual investor, who can invest a larger amount and avoid short-term redemptions to reduce or even avoid the fees.

Many funds do not have sales charges, but all funds charge investors for their operating expenses. The management fee to the investment adviser is typically the largest annual expense for an open- or closed-end fund. Other expenses include legal and accounting services, transfer agent fees, custodian charges, and board of director salaries. These expenses are taken from the dividend and/or interest income generated by the portfolio, with the net income then distributed to shareholders in the form of dividends at a frequency determined by the fund’s Board of Directors.

With a Series 6 license, the representative is qualified to sell open-end funds, and to sell closed-end funds during the primary offer period.  Whether open-end or closed-end, some investment company portfolios establish covered calls to enhance the funds’ overall return. For example, there is a closed-end fund trading under the symbol BXMX, which is an S&P 500 index fund that also engages in covered calls. Back when that fund was first sold to investors, a registered representative with a Series 6 license could have offered and sold shares to customers. And, of course, with a Series 6, the agent is licensed to sell any open-end fund that may engage in options trading in addition to managing the core portfolio of common stock.

The practice question likely gives the following four answer choices: diversified open-end fund, diversified closed-end fund, non-diversified open-end fund, and non-diversified closed-end fund. Assuming the portfolios are the same, we can determine which of the four is most aggressive and which is most conservative. First, closed-end funds typically use leverage, increasing their risk to investors. Second, diversification reduces many investment risks, making a non-diversified fund riskier than a diversified fund. Therefore, the most aggressive of the four is the non-diversified closed-end fund. The most conservative is the diversified, open-end fund.