Exam Series 63 topic 1 question 217 discussion

Actual exam question from FINRA's Series 63

Question #: 217
Topic #: 1

Which of the following practices would be prohibited in connection with the sale of investment company shares?
I. selling a client shares of a load stock fund when a no load stock fund with the same investment objective exists
II. selling the client shares of five S&P 500 Index mutual funds, offered by different fund families
III. encouraging a client to swap his money between two funds in the same family without informing him that this creates a taxable event

A. I, II, and III
B. I and II only
C. I and III only
D. II and III only

Show Suggested Answer

Suggested Answer: D 🗳️
The scenarios described in Selections II and III only would be prohibited. Five S&P 500 Index mutual funds, even if offered by different fund families, all have the same investment objective-duplicating the returns earned on the S&P 500 Index, and they will be invested in very similar stocks. Therefore, the client is getting little or no more diversification of risk by investing in five funds over investing in just one. The agent is just getting richer from more commissions.
Encouraging a client to swap his money between two funds in the same family without informing the client that this creates a taxable event is not providing the client with "full and fair disclosure." It may well be in the client's best interest to make the switch, but he needs to be made aware of the tax consequences. It is not necessarily prohibited to sell a client shares of a load stock fund when a no load stock fund with the same investment objective exists as long as the agent believes that the load stock fund is a better investment for his client.

by lolojepu at April 6, 2025, 1:50 a.m.

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