General Securities Sales Supervisor (Series10) Practice Exam

The FINRA 5% Policy applies to transactions in which of the following securities?

1. Open end investment companies and closed end investment companies

2. Unit investment trusts and real estate investment trusts

3. Closed end investment companies and real estate investment trusts

4. All of the above

The correct answer is: Closed end investment companies and real estate investment trusts

The FINRA 5% Policy is a guideline that establishes limits on the commissions and markups that can be charged for transactions involving certain securities. This policy is particularly relevant for transactions that have a certain level of liquidity and investor interest, which includes closed-end investment companies and real estate investment trusts (REITs). Closed-end investment companies are structured like mutual funds but issue a fixed number of shares that are traded on an exchange. Because of their trading nature and the variable pricing of their shares, the policy applies here to ensure fairness in pricing and to protect investors from excessive fees. Real estate investment trusts also fit under the FINRA 5% Policy. They can be publicly traded and have unique pricing dynamics similar to closed-end funds, thus falling under the same consideration for transaction costs. While open-end investment companies (mutual funds) and unit investment trusts (UITs) are generally not subject to the 5% Policy because they do not trade on an exchange and their share prices are determined by NAV, closed-end investment companies and REITs do align with the policy criteria. Thus, the correct answer centers on the inclusion of closed-end investment companies and real estate investment trusts, providing a clear application of the FINRA guidelines for certain transaction