Performance Management Network (PMN)

Correct: Subaccount management fees are the costs associated with the professional management of the underlying investment portfolios within a variable annuity. These fees are charged by the investment adviser, are asset-based, and are deducted directly from the subaccount’s assets. This deduction is reflected in the daily calculation of the subaccount’s unit value, or Net Asset Value (NAV).

Incorrect: Describing fees as fixed dollar amounts for policy issuance refers to administrative or contract maintenance fees, which are not management fees. Attributing the fees to the cost of a guaranteed death benefit describes mortality and expense (M&E) risk charges, which are insurance-related costs rather than investment management costs. Describing them as charges applied at the time of purchase refers to sales loads, which are distribution costs rather than ongoing management fees.

Takeaway: Subaccount management fees are asset-based charges paid to the investment adviser for managing the underlying portfolio and are reflected in the subaccount’s unit value.

Correct: A Balanced Subaccount (or Balanced Fund) is characterized by its dual investment in both stocks (equities) and bonds (debt). The goal is to provide a ‘middle-of-the-road’ investment profile that offers more growth potential than a pure bond fund but with less risk and volatility than a pure stock fund. By maintaining a mix of these asset classes, the fund seeks to provide a combination of capital growth, current income, and conservation of capital.

Incorrect: Investing primarily in short-term debt to maintain a stable NAV describes a Money Market Fund, not a Balanced Fund. Moving 100% of assets between classes based on market timing describes an aggressive tactical or market-timing strategy, whereas balanced funds typically maintain a relatively consistent ratio of stocks to bonds. Tracking a specific index to maximize appreciation describes an Index Fund or a Growth Fund, which lacks the fixed-income component essential to a balanced strategy.

Takeaway: Balanced subaccounts provide a diversified investment approach by holding both stocks and bonds to balance the objectives of growth, income, and capital preservation.

Correct: The Guaranteed Minimum Death Benefit (GMDB) is a core feature of variable annuities designed to protect the beneficiary against market declines. If the contract owner dies during the accumulation phase, the insurer guarantees to pay the beneficiary the greater of the current market value of the account or a minimum amount, which is typically the sum of all premiums paid minus any prior withdrawals (the ‘return of premium’ floor).

Incorrect: The suggestion that the benefit is only payable if the contract value exceeds premiums is incorrect because the GMDB is specifically designed to provide a floor when the market value is lower than the investment. The idea that an insurer must liquidate subaccounts and move them to the general account is false; the contract remains variable, and the insurer manages the risk of the guarantee through its own reserves or hedging. Capping the benefit at a percentage of the highest historical NAV during the first five years describes a specific, non-standard ‘step-up’ or ‘ratchet’ provision, rather than the fundamental operation of a standard GMDB.

Takeaway: The standard GMDB ensures that a beneficiary receives at least the net invested amount regardless of market performance, provided the owner dies before the contract is annuitized.

Correct: Money market subaccounts, like money market mutual funds, aim to maintain a stable Net Asset Value (NAV) of $1.00 per share. However, this is an objective rather than a guarantee. Furthermore, because these are securities products held within the separate account of an insurance company, they are not deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC).

Incorrect: The subaccount is part of the separate account, not the general account, so it does not carry the insurer’s guarantee of principal. While money market subaccounts are relatively low-risk, they still charge management fees and administrative expenses that reduce the overall yield. Finally, money market instruments are short-term, high-quality debt (such as T-bills and commercial paper), not high-yield or long-term debt instruments.

Takeaway: Money market subaccounts aim for a stable $1.00 NAV and liquidity but are not guaranteed and lack federal deposit insurance.

Correct: Under the Investment Company Act of 1940, mutual funds (open-end investment companies) are required to send redemption proceeds to shareholders within seven calendar days of receiving a request in good order. While Class B shares carry a Contingent Deferred Sales Charge (CDSC) if redeemed within a specific timeframe, the existence of this charge or an internal policy exception request does not allow the firm or the fund to exceed the seven-day statutory limit for payment.

Incorrect: Delaying payment for a conflict of interest waiver would violate the seven-day redemption rule mandated by federal law. Waiving the CDSC is generally not permitted at the discretion of a wealth manager or onboarding lead, as these charges are contractual obligations defined in the fund’s prospectus. Suspending redemptions is only allowed under extreme circumstances, such as when the New York Stock Exchange is closed or by specific order of the SEC, and cannot be done for routine compliance investigations.

Takeaway: Mutual funds are legally required to provide redemption proceeds within seven calendar days of a request made in proper order.

Correct: For large investment amounts, Class A shares are typically the most appropriate because of breakpoints—discounts on the front-end sales charge for reaching specific dollar thresholds. At $500,000, the sales charge is significantly reduced. Furthermore, Class A shares generally have lower annual 12b-1 fees (operating expenses) than Class B or C shares, making them the most economical choice for long-term investors where the lower annual costs outweigh the reduced initial load.

Incorrect: Class B shares are generally not recommended for large investments because they do not offer breakpoints and carry higher annual 12b-1 fees; many fund families actually prohibit large purchases of Class B shares for this reason. Class C shares have high ‘level loads’ (12b-1 fees) that make them the most expensive option for long-term holders. Splitting an investment across different share classes of the same fund is generally considered an unsuitable practice as it prevents the client from reaching higher breakpoint levels on Class A shares, thereby increasing total costs.

Takeaway: Class A shares are usually the most cost-effective for long-term, large-scale mutual fund investments due to the availability of breakpoints and lower ongoing internal expenses.

Correct: Under the Investment Company Act of 1940, the investment advisory contract must be approved initially by the board and by a majority of the outstanding shares. Following the initial two-year term, the contract must be renewed annually. This renewal specifically requires the approval of a majority of the board’s disinterested (independent) directors, who are not affiliated with the fund’s investment adviser or underwriter, to ensure that the contract remains in the best interest of the shareholders.

Incorrect: Shareholder approval is typically required for the initial contract or for material changes to the contract, but the standard annual renewal is a function of the Board of Directors, not a semi-annual shareholder vote. While the SEC regulates investment companies, it does not conduct performance audits as a prerequisite for the board’s contract renewal process. Finally, the Act requires a majority of disinterested directors to approve the renewal, not a unanimous vote of the entire board.

Takeaway: The Investment Company Act of 1940 mandates that a majority of a fund’s independent (disinterested) directors must approve the annual renewal of the investment advisory contract.

Correct: Under FINRA Rule 2210 and SEC Rule 482, any communication that includes performance data for an open-end management investment company must include standardized average annual total returns for 1-, 5-, and 10-year periods (or since inception). These figures must be updated through the most recent calendar quarter-end to ensure that investors are not misled by short-term performance spikes and receive a balanced view of the fund’s history.

Incorrect: Providing a benchmark comparison is a best practice but does not satisfy the regulatory requirement for standardized 1-, 5-, and 10-year returns. Disclosing top holdings is a transparency measure but is not the primary requirement for performance reporting. While some communications require pre-filing, the primary compliance failure in this scenario is the lack of standardized performance timeframes, not the filing status itself.

Takeaway: Mutual fund performance communications must always include standardized 1-, 5-, and 10-year average annual total returns to provide a balanced historical perspective.

Correct: Under FINRA Rule 2330, when recommending a variable annuity exchange, the firm must determine if the transaction is suitable by considering whether the customer will incur a surrender charge, be subject to a new surrender period, or lose existing benefits. The firm must have a reasonable basis to believe that the customer would benefit from the enhancements and improvements of the new contract compared to the costs and disadvantages of the exchange.

Incorrect: While representative training is important for general compliance, it is not the specific suitability standard for a 1035 exchange. Maximizing 401(k) contributions is a general financial planning consideration but does not address the specific cost-benefit analysis required for an annuity switch. While the financial strength of an insurer is a factor in product selection, the primary regulatory concern in an exchange is the potential for ‘churning’ or unnecessary costs imposed on the client through new surrender periods and fees.

Takeaway: Suitability for variable annuity exchanges requires a documented analysis of whether the new contract’s benefits justify the costs, such as new surrender periods and charges.

Correct: The transfer agent is the entity responsible for the administrative and record-keeping functions of a mutual fund. This includes maintaining the official registry of who owns the fund’s shares, processing the issuance of new shares when investors buy in, canceling shares when they redeem, and ensuring that dividends and capital gains are distributed to the correct shareholders of record.

Incorrect: The custodian is responsible for the safekeeping of the fund’s cash and securities, but the underlying portfolio securities are not registered in the names of individual fund shareholders. The calculation of the Net Asset Value (NAV) is an accounting function typically performed by the fund accountant or the custodian, not the transfer agent. The approval of marketing materials and sales literature is a compliance function handled by the principal underwriter and its registered principals, not the transfer agent.

Takeaway: The transfer agent’s primary role is to maintain shareholder records and manage the administrative processes of share issuance, redemption, and payment distributions.