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Financial Services · Series 26

FINRA Series 26 – Investment Company Products and Variable Contracts Limited Principal Exam Practice Test

The FINRA Series 26 covers supervision of mutual fund and variable contract sales, with attention to product features, customer suitability, disclosures, and sales practices. Practice topics include mutual fund share pricing and fees, distributions and taxes, variable annuity contract options, and the steps a principal takes when reviewing recommendations for customers with different investment objectives and levels of experience.

Exam overview

Exam providerFinancial Industry Regulatory Authority
Exam codeSeries 26
CategoryFinancial Services

About the FINRA Series 26 – Investment Company Products and Variable Contrac… Exam

Prepare to assess how investment company products and variable contracts work and how sales activity should be supervised. Mutual fund concepts include net asset value, sales charges, 12b-1 fees, diversification, dollar-cost averaging, and the tax treatment of distributions in taxable accounts. Variable contract questions can involve fixed and separate accounts and the tax treatment of deferred earnings in nonqualified annuities. Supervisory decisions require connecting product risks and costs to a customer’s objectives, financial circumstances, investment experience, and risk tolerance. You may also need to recognize the role of required offering documents, identify when a product’s complexity calls for additional explanation, and determine whether a recommendation is adequately supported before a transaction proceeds.

Sample Practice Questions

Review a selection from this exam's published US Practice Tests practice bank.

Question 1

A registered representative learns that a customer has limited investment experience and is unsure about the risks of a complex product. What is the most appropriate next step before proceeding with a recommendation?

  1. AExplain the product’s material features and risks in a manner the customer can understand
  2. BAssume the customer understands because the product has a prospectus
  3. CRecommend the product immediately so the customer can decide after purchase
  4. DAvoid discussing risks unless the customer specifically requests them
Show answerCorrect answer: A

A representative should communicate material product features and risks in a way the customer can understand and should not rely on disclosure documents alone to substitute for an appropriate discussion. Recommendations must be evaluated in light of the customer’s profile and applicable obligations.

Question 2

A mutual fund makes a new offer of shares to the public. Which document generally must be delivered to a prospective purchaser no later than the time of sale?

  1. AThe fund’s current prospectus
  2. BThe fund’s latest proxy statement
  3. CThe transfer agent’s annual report
  4. DThe fund’s portfolio manager’s employment agreement
Show answerCorrect answer: A

The prospectus provides key information about the fund, including its objectives, risks, fees, and terms of the offering. It is the principal disclosure document provided to prospective purchasers.

Question 3

A mutual fund has a 12b-1 fee. What is the fee generally used to help pay for?

  1. APortfolio securities held by the fund
  2. BDistribution and shareholder-service expenses
  3. CFederal income taxes owed by the fund
  4. DA guarantee against loss of principal
Show answerCorrect answer: B

A 12b-1 fee is an annual fund operating expense used for distribution-related costs and, where permitted, shareholder services. It is deducted from fund assets and is not a guarantee or investment return.

Question 4

A mutual fund’s net asset value per share is calculated by which general method?

  1. ASubtracting liabilities from assets and dividing by shares outstanding
  2. BDividing annual distributions by the fund’s sales charge
  3. CAdding liabilities to assets and multiplying by shares outstanding
  4. DUsing the fund’s original public offering price for every calculation
Show answerCorrect answer: A

NAV per share is generally calculated by taking the value of fund assets, subtracting liabilities, and dividing the result by shares outstanding. Sales charges, if applicable, are separate from the NAV calculation.

Question 5

Which statement best describes the tax treatment of earnings in a nonqualified variable annuity before a distribution is made?

  1. AEarnings are generally taxed each year as they accrue.
  2. BEarnings generally grow tax-deferred, with taxation generally arising when amounts are distributed.
  3. CEarnings are always tax-free if the owner is at least 59½.
  4. DAll premiums are deductible from federal income tax.
Show answerCorrect answer: B

Nonqualified variable annuities generally provide tax-deferred growth. Tax deferral does not make earnings tax-free; distributions may be taxable, and additional tax may apply in some circumstances.

Question 6

An investor wants a mutual fund focused on companies in a single industry. Which risk is typically greater than for a broadly diversified stock fund?

  1. AConcentration risk from relying heavily on one industry
  2. BThe risk that the fund will have no market exposure
  3. CThe risk that all holdings will be guaranteed by the U.S. government
  4. DThe risk that the fund’s share price cannot fluctuate
Show answerCorrect answer: A

A sector-focused fund has concentrated exposure to a particular industry, so industry-specific developments can have a substantial effect on its results. Broad diversification across industries may reduce this concentration risk, though it cannot eliminate market risk.

Question 7

A customer invests in a mutual fund through a dollar-cost averaging plan. Which statement best describes the plan’s effect?

  1. AIt guarantees a profit if the customer continues investing long enough.
  2. BIt invests a fixed dollar amount at regular intervals, purchasing more shares when the price is lower and fewer when it is higher.
  3. CIt ensures that every purchase is made at the fund’s lowest price.
  4. DIt eliminates the risk of loss from market fluctuations.
Show answerCorrect answer: B

Dollar-cost averaging means investing a set amount on a regular schedule. The number of shares purchased varies with the share price, but the strategy does not guarantee a profit or prevent investment losses.

How to use this practice test

Access is free. A session draws up to 20 random questions from the 50-question Series 26 practice bank. After completing the session, review the results to identify gaps in product knowledge or supervisory judgment, then revisit those concepts before another attempt.

Preparation tips

  • Work through how mutual fund NAV is calculated, and distinguish NAV from public offering price when sales charges apply.
  • Compare mutual fund fees, including 12b-1 charges, with the costs and risks they represent to shareholders.
  • Review how ordinary dividends and nonqualified variable annuity earnings are generally taxed, distinguishing distributions from deferred growth.
  • For suitability scenarios, connect a customer’s objectives, experience, financial situation, and risk tolerance to product features and risks.
  • Practice identifying when a prospectus or other offering disclosure is relevant and what a principal should review before approving sales activity.
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