FINRA Series 26 Practice Test & Mock Exam

Series 26 rewards candidates who can supervise investment company and variable-contract business, review suitability and disclosure issues correctly, and enforce principal-level controls across product and sales activity. If you are searching for Series 26 sample questions, a practice test, mock exam, or simulator, this is the main Securities Prep page to start on web and continue on iOS or Android with the same account. This page includes 24 sample questions with detailed explanations so you can try the exam style before opening the full app question bank.

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Free diagnostic: Try the 110-question Series 26 full-length practice exam before subscribing.

What this Series 26 practice page gives you

• a direct route into the Securities Prep simulator for Series 26
• 24 sample questions with detailed explanations across the main Series 26 supervision buckets
• targeted practice around principal supervision for mutual funds and variable products
• detailed explanations that show why the strongest supervisory response is the most defensible
• a clear free-preview path before you subscribe
• the same subscription across web and mobile

Series 26 exam snapshot

• Provider: FINRA
• Exam: Investment Company and Variable Contracts Products Principal
• Practice reference: 110 practice questions in 165 minutes
• Registration context: principal supervision for packaged products and variable contracts

Topic coverage for Series 26 practice

• Product supervision: mutual funds, variable annuities, variable life, and related product-control questions
• Sales-practice oversight: suitability, disclosure, approvals, and representative supervision
• Communications and follow-through: communications review, documentation, and corrective action

What Series 26 is really testing

Series 26 is primarily a packaged-products-supervision exam:

• identifying the product first so the right cost, disclosure, and approval rules are applied
• recognizing when share-class, breakpoint, replacement, or rider issues make the supervisory answer change
• treating suitability, Reg BI style care, and documentation as principal-level control questions rather than representative-level suggestions
• understanding that product costs, conflicts, and customer time horizon usually matter more than product marketing language
• choosing the response that protects the customer, leaves a clear review trail, and would survive branch or regulatory review

Common question styles

• What should the principal do next?: approve, reject, revise, escalate, compare alternatives, or document
• What is the real issue?: share class, breakpoint, replacement, disclosure gap, communication problem, or unsuitable objective match
• What changed the answer?: holding period, liquidity need, surrender charge, fee structure, or customer experience
• What makes the recommendation defensible?: side-by-side review, principal approval, retained support, and clear cost comparison
• What is the main failure mode?: compensation conflict, ignored customer need, weak documentation, or missed disclosure

High-yield pitfalls

• choosing the product story while ignoring total cost of ownership
• missing breakpoint, ROA, LOI, or householding logic in mutual-fund scenarios
• treating variable annuity exchanges as harmless without comparing surrender charges and actual customer benefit
• approving a strategy because the representative likes the feature rather than because the profile supports it
• relying on disclosures alone to cure a recommendation that is still weak on suitability or cost
• fixing the recommendation issue but skipping the principal review and recordkeeping step

How Series 26 differs from similar routes

How to use the Series 26 simulator efficiently

1. Start with product-supervision and suitability drills so the packaged-product workflow becomes easier to apply.
2. Review every miss until you can explain which principal control or disclosure issue changed the answer.
3. Move into mixed sets once you can switch between product, sales-practice, and communication scenarios without losing pace.
4. Finish with timed runs so the 150-minute pace feels controlled.

Free preview vs premium

• Free preview: 24 public sample questions on this page plus the web app entry so you can validate the question style and explanation depth.
• Premium: the full Series 26 practice bank, focused drills, mixed sets, timed mock exams, detailed explanations, and progress tracking across web and mobile.

Free samples and full bank

• Live now: this exact practice route is available in Securities Prep on web, iOS, and Android.
• On-page sample set: this page includes 24 public sample questions from the current practice coverage.
• Full app: open the Securities Prep web app or mobile app for broader timed coverage.

Good next pages after Series 26

• Series 6 if you want the representative-level packaged-products route beside the principal page
• Series 24 if you are comparing packaged-products supervision against broad principal coverage
• Series 39 if you are comparing packaged-products principal work against the DPP-principal path
• FINRA if you want the full representative, principal, and specialist route map first

Free review resources

Use these free SecuritiesMastery.com resources for concept review, then return to this page when you are ready to practice in Securities Prep.

• Series 26 Cheat Sheet
• Series 26 Study Guide

Focused sample questions

Use these focused Series 26 sample-question pages when you want to isolate one official topic area before returning to the mixed simulator.

• Personnel and Registration
• Sales Practice Supervision
• Compliance and Business Processes
• Free Series 26 Full-Length Practice Exam

24 Series 26 sample questions with detailed explanations

These sample questions cover multiple blueprint areas for Series 26. Use them to check your readiness here, then move into the full Securities Prep question bank for broader timed coverage.

Question 1

Topic: Function 1 — Personnel Management Activities and Registration of the Broker-Dealer

During a routine OSJ review, a Series 26 principal finds the following in a representative’s registration file. Firm WSPs require U4 amendments to be filed within 30 calendar days of the firm learning of the change, and the file must retain evidence of the CRD submission and the principal’s approval/attestation.

Exhibit: Registration change log (all dates 2025)

Event learned by firm:  April 1 (legal name change)
U4 amendment submitted: May 4

Which documentation entry best meets the firm’s recordkeeping expectation for this item?

• A. Late by 3 days; retain CRD receipt and approval record
• B. Late by 1 day; retain CRD receipt and approval record
• C. On time; retain only an updated U4 printout
• D. Late by 4 days; retain CRD receipt and approval record

Best answer: A

Explanation: From April 1 to May 4 is 33 calendar days, which exceeds the firm’s 30-day standard by 3 days. To satisfy registration-file recordkeeping expectations, the principal should ensure the file contains auditable evidence of the CRD submission and the principal’s approval/attestation, along with an exception notation for the late filing.

Question 2

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

During the annual financial responsibility review, a Series 26 principal is asked to choose between two risk-transfer actions:

• Proposal 1: Increase the firm’s fidelity bond coverage for losses caused by dishonest acts of employees (e.g., theft, forgery) involving customer funds.
• Proposal 2: Increase the firm’s errors-and-omissions (E&O) insurance limits for potential customer claims alleging unsuitable recommendations.

Which proposal best matches the purpose of a fidelity bond and how bonding requirements support customer protection?

• A. Proposal 1, because it protects customers against market losses in mutual funds
• B. Proposal 1, because it covers customer losses from employee dishonesty
• C. Proposal 1, because it guarantees payment if the broker-dealer becomes insolvent
• D. Proposal 2, because it covers customer losses from employee dishonesty

Best answer: B

Explanation: Fidelity bonds are a financial-responsibility safeguard intended to cover losses caused by dishonest or fraudulent acts by firm employees, such as theft or forgery involving customer funds. This bonding requirement helps protect customers by ensuring the firm has coverage for employee misconduct risk, rather than for investment performance or ordinary sales-practice disputes.

Question 3

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

A surveillance alert flags a retail customer who redeemed $148,000 from several mutual funds and sent two same-day wires to a newly added third-party beneficiary in a higher-risk foreign jurisdiction. The AML analyst reviewed the customer’s stated occupation, recent account history, and an updated adverse-media/OFAC screen and recommends closing the alert as “reasonable activity.” As the designated AML supervisor, what is the primary control concern you must address before approving closure of the alert?

• A. Whether the wires complied with mutual fund breakpoint rules
• B. Sending the customer a notice that the alert was cleared
• C. Incomplete alert-disposition documentation and monitoring plan
• D. Whether CIP documents were collected at account opening

Best answer: C

Explanation: Closing an AML alert is a supervised decision that must be fully documented so the firm can evidence what was reviewed, why the activity was not deemed suspicious (or why it was escalated), and who approved the outcome. The file should also capture any follow-up steps such as enhanced monitoring parameters or specific re-review triggers based on the activity.

Question 4

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

An associated person helps a customer purchase interests in a friend’s start-up through a subscription agreement that is not offered by the firm, and the associated person will receive a finder’s fee. Which option best matches how this activity is treated under broker-dealer supervision and the likely consequence if done without required notice/approval?

• A. It is a non-securities referral, permitted if the associated person discloses the referral fee to the customer
• B. It is only an outside business activity, requiring notice but not firm approval
• C. It is personal trading, permitted as long as it is precleared under the firm’s employee trading policy
• D. It is a private securities transaction requiring prior written notice and written firm approval; doing it without approval can lead to firm discipline and regulatory action

Best answer: D

Explanation: Arranging a customer’s purchase of an unapproved offering away from the firm—especially when the associated person is paid—fits the definition of a private securities transaction (often called “selling away”). Firms typically require prior written notice and, when compensation is involved, written approval and supervision. Participating without following those requirements can trigger internal discipline and regulatory sanctions.

Question 5

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

A variable annuity carrier invites your firm’s registered reps to a “Product Education Summit” at a beachfront resort. The carrier will pay airfare and two nights’ lodging for each rep and one guest. Attendance is limited to the carrier’s “top 15 producers” at your firm. The agenda shows 2 hours of product updates and 6 hours of golf and spa activities.

As the Series 26 principal, what is the primary supervisory risk/red flag that should drive your decision to reject or escalate this invitation?

• A. Improper non-cash compensation disguised as training
• B. Breakpoint avoidance on mutual fund purchases
• C. AML red flag due to unusual funds movement
• D. Potential unsuitable variable annuity exchange activity

Best answer: A

Explanation: Non-cash compensation can include training or education meetings only when they are bona fide and not tied to sales production. Here, attendance is limited to top producers, the carrier pays travel and lodging for a guest, and most of the event is entertainment. Those facts are classic indicators the event is an impermissible non-cash compensation arrangement rather than legitimate education.

Question 6

Topic: Function 1 — Personnel Management Activities and Registration of the Broker-Dealer

A member firm is opening a new leased office where two registered representatives will regularly meet retail customers to recommend mutual funds and variable annuities and accept application paperwork. The location will be publicly advertised as a local office, and an OSJ principal will supervise the activity from a different site. The firm’s WSPs require that locations be properly registered in CRD before any customer meetings occur. As the Series 26 principal, what is the BEST supervisory action to take before the new office begins business?

• A. Update the firm’s Form BD to add the new office location
• B. File Form BR to register the branch and designate supervisory contacts
• C. Amend each representative’s Form U4 with the new office address
• D. Begin operations and file the required branch paperwork after first sales

Best answer: B

Explanation: Because the location will be held out to the public and used for in-person sales activity, it must be treated as a branch office and properly recorded/registered through CRD. Form BR is the mechanism used to register the branch and report key branch information (and later changes/closures). Completing the Form BR filing before customer meetings aligns with the firm’s WSP control and reduces regulatory risk.

Question 7

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

A broker-dealer launched a new variable annuity platform six months ago and completed new-product approval. The Series 26 principal is updating WSPs to document and evidence ongoing post-launch oversight of this business line.

Which practice is NOT an appropriate way to document and evidence ongoing oversight?

• A. Retaining exception reports (e.g., exchanges, high surrender charges) showing review, disposition, and escalation where needed
• B. Maintaining periodic dashboards of sales, replacements, complaints, and concentration trends with supervisory sign-offs
• C. Relying on a verbal attestation from sales management with no retained metrics or exception reports
• D. Documenting a risk-based periodic product review that records findings, corrective actions, and completion dates

Best answer: C

Explanation: Post-launch supervision must be demonstrable through records that show what was monitored, what exceptions were found, who reviewed them, and what actions were taken. Dashboards, exception reports, and periodic documented reviews create an audit trail of ongoing oversight. Unsupported verbal assurances without retained evidence do not satisfy this standard.

Question 8

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

A broker-dealer is a SIPC member and redesigns its website and mobile app. After the redesign, the “Account Protection” page states: “All losses are covered by SIPC up to $500,000,” and it no longer includes SIPC’s website or telephone number or any reference to the SIPC brochure. The firm’s principal did not require pre-use compliance review of the revised page and the issue is discovered during an internal audit.

What is the most likely outcome of this control failure?

• A. No action is needed because SIPC membership automatically covers all investment losses up to the limit
• B. The firm’s only obligation is to add the SIPC logo back to the page because the firm is a SIPC member
• C. The firm can wait to remediate unless a customer files a written complaint about SIPC coverage
• D. The firm faces regulatory exposure for misleading SIPC-related communications and must correct the content and deliver accurate SIPC information to affected customers

Best answer: D

Explanation: SIPC information given to customers must be accurate and not misleading, and firms must provide customers clear SIPC contact/brochure availability information. Stating that “all losses are covered” misrepresents SIPC protection and omitting SIPC contact/brochure references undermines required SIPC disclosures. The likely consequence is regulatory exposure and a need for prompt corrective disclosure and supervisory remediation.

Question 9

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

During a quarterly supervisory control review, a Series 26 principal learns senior management has signed a letter of intent to sell 30% of the firm’s voting equity to an outside holding company that will appoint 2 of 5 board members. Management also wants to open a new OSJ next month to begin variable annuity sales and asks the principal to approve the rollout plan.

What is the best next supervisory step?

• A. Escalate as a potential CMA, determine if FINRA approval is required, and halt implementation until resolved
• B. Wait for the annual audit to confirm whether any membership application was required
• C. Proceed with the new OSJ and treat the ownership change as an internal corporate matter
• D. Approve the rollout plan and amend Form BD after the ownership change closes

Best answer: A

Explanation: A significant ownership/control change is a material change that can trigger a Continuing Membership Application (CMA) and may require FINRA approval before the firm proceeds. The principal’s next step is to escalate the issue through the firm’s membership-change process, determine CMA applicability, and pause the rollout until the requirement is satisfied. This prevents an unapproved material change from being implemented.

Question 10

Topic: Function 1 — Personnel Management Activities and Registration of the Broker-Dealer

A member firm hires a registered representative who was permitted to resign from his prior firm after a pattern of customer complaints alleging mutual fund switching and one pending arbitration. He is not statutorily disqualified, but your firm plans to place him in an OSJ where he will solicit variable annuity exchanges for retail customers, including seniors.

During his first week, he submits three variable annuity replacement recommendations for customers ages 72–78 that would trigger new surrender-charge periods. As the principal, what is the single best supervisory action to take before approving these transactions?

• A. Delay action until the next branch inspection and then decide whether additional supervision is needed
• B. Implement a written heightened supervision plan with defined scope, monitoring, documentation, and escalation triggers before approving replacements
• C. Approve the replacements if the rep completes variable annuity training and signs an annual compliance attestation
• D. Require the rep to route all future correspondence through advertising review, but allow replacements to proceed with standard OSJ review

Best answer: B

Explanation: The rep’s history and the immediate submission of senior-focused variable annuity replacements create elevated conduct and suitability risk, making heightened supervision prudent. The best action is a written plan put in place before approvals, specifying the scope of activity covered, the extra monitoring steps, how reviews are evidenced, and clear escalation criteria when red flags appear.

Question 11

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

During a quarterly supervisory control test, a Series 26 principal reviews a compensation-focused exception report.

Exhibit: Exception report (snapshot)

Rep: J. Lee (Branch 12)
Product sold: ABC Proprietary VA (10-year surrender)
Comparable VA on platform: DEF VA (5-year surrender)
Rep payout: 7.0% (ABC) vs 4.0% (DEF)
Trend: 9 of 11 ABC sales occurred in the last 10 business days of the quarter

Which is the principal’s best next step to monitor and mitigate the potential compensation-related conflict before concluding the test?

• A. Immediately change the firm’s entire VA payout grid and treat the issue as resolved
• B. Escalate the activity to AML for possible SAR filing due to quarter-end sales clustering
• C. Perform a targeted review of the flagged VA sales for disclosed rationale and cost comparisons, evaluate the payout incentive as a conflict, and document/escalate any needed supervisory controls
• D. Close the test because both products are on the approved platform list

Best answer: C

Explanation: Differential compensation tied to a specific product, combined with end-of-period sales clustering, is a classic conflict indicator that requires follow-up. The principal should expand testing to determine whether recommendations were influenced by payout incentives and whether required disclosures and documentation support the recommendations. Findings should be documented and used to implement or strengthen supervisory controls.

Question 12

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

As the Series 26 principal at an OSJ, you review a monthly telemarketing exception report. Your WSPs require that cold calls (i) occur only between 8:00 a.m. and 9:00 p.m. in the prospect’s local time, (ii) transmit caller identification (no “Unknown/Blocked”), (iii) use an opening script that identifies the caller and firm and states the purpose, and (iv) retain evidence of do-not-call (DNC) scrubbing and call activity.

Exhibit: Exception report (selected lines)

Rep: J. Lee   Campaign: "IRA Rollover"   Dialer: personal mobile
Calls outside 8a-9p local: 14
Caller ID shown as "Unknown": 22
DNC scrub report attached: No
Call recordings/log export attached: No

Which is the primary supervisory risk/red-flag/control concern raised by this report?

• A. Breakpoint avoidance in mutual fund purchases
• B. AML red flags requiring immediate SAR filing
• C. Improper variable annuity replacement without required forms
• D. Potential telemarketing violations and inability to evidence compliance

Best answer: D

Explanation: The exception report points directly to core cold-calling restrictions: calling outside permitted hours, failing to transmit caller identification, and lacking proof of DNC scrubbing and call activity. A principal’s first concern is stopping and remediating these potential telemarketing violations and ensuring the firm can document and supervise compliance going forward.

Question 13

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

During a supervisory review, a registered rep recommends a customer invest $200,000 in a mutual fund’s Class C shares because “there’s no front-end sales charge.” The customer states a 7-year time horizon.

Fee schedule (all other fund expenses are identical):

• Class A: 3.00% front-end load and a 0.25% annual 12b-1 fee
• Class C: no front-end load and a 1.00% annual 12b-1 fee

Assume the account value stays at $200,000 for the entire 7 years. Approximately how much higher are the customer’s total distribution-related charges in Class C than in Class A over 7 years?

• A. $4,500
• B. $10,500
• C. $1,500
• D. $6,000

Best answer: A

Explanation: Compute total distribution-related costs for each share class using the stated assumptions. Class A has an upfront load plus a lower annual 12b-1 fee, while Class C has no upfront load but a higher annual 12b-1 fee. Over 7 years at a constant $200,000 value, Class C’s total distribution-related charges are higher by $4,500.

Question 14

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

During an annual supervisory control test, a Series 26 principal reviews the firm’s business continuity plan (BCP) customer disclosure process. The WSPs require that retail mutual fund and variable annuity customers receive (or be able to readily obtain) a written summary of the firm’s BCP and emergency contact information, and that the firm retain evidence of how the notice was made available.

The principal learns the statement vendor removed the BCP disclosure insert two quarters ago, the firm’s website has no BCP summary or instructions to obtain it, and Operations cannot produce records showing any alternative notice to customers.

Which is the primary supervisory risk/red flag in this situation?

• A. The firm is using misleading variable annuity rider performance illustrations
• B. Customers lack documented access to required BCP information
• C. The firm is failing to monitor mutual fund breakpoint discounts
• D. The firm has an unresolved AML red flag requiring a SAR filing

Best answer: B

Explanation: The core issue is a breakdown in making required BCP information available to customers and an inability to demonstrate that availability. A principal should view missing notices, missing web access, and missing records as a control failure that must be remediated and documented.

Question 15

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

You are the Series 26 principal at an OSJ reviewing a rep’s draft flyer for a retirement seminar aimed at customers ages 60–75. The rep wants to email the flyer to 800 retail prospects tomorrow, and your firm’s WSPs require principal approval and record retention before first use of any retail communication.

Exhibit: Flyer excerpt (draft)

• “Growth Fund A returned 18.4% in the last 12 months—beat the market.”
• “Low cost—returns shown do not reflect any fees or charges.”
• “Invest now and you can expect similar results.”

The fund has a front-end sales charge and ongoing expenses. What is the single best supervisory action?

• A. Approve now and have Compliance review and document changes after the first mailing
• B. Approve the flyer if it adds “past performance is not a guarantee”
• C. Do not approve; require revised, standardized net performance with required fee/load disclosure and removal of any projection language before use
• D. Allow the email to go out tomorrow if the rep delivers the prospectus at the seminar

Best answer: C

Explanation: The draft presentation is misleading because it highlights a favorable period while showing performance that does not reflect fees/charges and it implies future performance (“expect similar results”). The best supervisory decision is to withhold approval and require a compliant revision that presents standardized total return reflecting required fees/loads, removes projections, and is approved/retained before first use.

Question 16

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

During the firm’s electronic communications review, an OSJ supervisor sees a registered rep’s text to a customer: “Buy XYZ today—nonpublic news drops tomorrow. Don’t mention me.” No trade has occurred yet. As the principal responsible for sales practice supervision, what is the best next supervisory step in the proper sequence?

• A. Interview the rep and document an informal counseling memo
• B. Notify the issuer and file a SAR with FinCEN immediately
• C. Wait for a trade to occur, then open an internal investigation
• D. Restrict trading, preserve records, and notify Legal/Compliance

Best answer: D

Explanation: A potential insider trading red flag requires immediate escalation and evidence preservation, even if no trade has occurred. The supervisor should implement controls to prevent further trading risk (such as a temporary restriction) while ensuring records are retained. Legal/Compliance should direct the investigation and any required external notifications.

Question 17

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

A registered rep places a mutual fund purchase in a customer’s cash account. The account is not approved for margin. The firm’s WSPs apply Regulation T prompt payment rules: if full payment is not received by the end of the 4th business day after trade date, the firm must promptly cancel/liquidate to avoid extending credit.

Exhibit: Order and payments (USD)

Trade date: Mon, June 3
Buy: ABC Growth Fund (Class A)
Amount: $62,500
Payment received by Fri, June 7:
  Check: $12,500
  ACH:   $20,000
Customer request on June 7: “I’ll pay the rest next week.”

As the Series 26 principal, what is the most appropriate supervisory instruction?

• A. Liquidate/cancel to cover the $30,000 unpaid balance
• B. Liquidate/cancel to cover the $29,000 unpaid balance
• C. Grant an extension because mutual funds are redeemable securities
• D. Carry a $32,500 debit and collect it with the next statement

Best answer: A

Explanation: Regulation T requires prompt payment for purchases in a cash account; otherwise the broker-dealer is effectively financing the customer. Here, the firm received $12,500 + $20,000 = $32,500 by the deadline, leaving $30,000 unpaid. The principal should direct a prompt cancelation/liquidation action for the unpaid amount and document the Reg T-driven remediation under the WSPs.

Question 18

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

During a routine review of the firm’s branch office inspection files, a Series 26 principal sees the following entry in the inspection workpaper for Branch 0142.

Exhibit: Office inspection workpaper (excerpt)

Branch: 0142 (non-OSJ)
Inspection date: May 6, 2025
Inspector: J. Lee
Report status: Final
File location/retention: "PDF saved on inspector laptop (C:\Inspections\0142). Upload to SharePoint if requested."

Based on the exhibit, which interpretation is best supported?

• A. The inspection recordkeeping is adequate if the laptop is password-protected
• B. The inspection record is not being maintained in an approved, readily retrievable firm recordkeeping system
• C. The retention method is acceptable if a copy is sent to the branch manager
• D. No recordkeeping issue exists because only inspection findings must be retained

Best answer: B

Explanation: The workpaper states the final inspection report is stored only on an inspector’s laptop and uploaded only upon request. Office inspection documentation is part of the firm’s supervisory records and must be maintained as firm books and records in a designated recordkeeping system that supports completeness and ready retrieval for oversight and regulators.

Question 19

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

Which statement describes an additional communications requirement for variable annuities or variable life compared with non-variable insurance products?

• A. Describe surrender charges, but not ongoing subaccount expenses
• B. Treat the product as an insurance communication needing no principal approval
• C. Explain that contract values fluctuate and may lose principal
• D. State that separate account performance is guaranteed by the insurer

Best answer: C

Explanation: Because variable annuities and variable life have an investment component, related retail communications must be balanced and not misleading about market risk. A core additional requirement is clearly communicating that values can fluctuate and the customer can lose principal. Communications cannot imply that separate account performance is guaranteed like a fixed insurance product.

Question 20

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

During an OSJ complaint trend review, a Series 26 principal notices several customers claiming they were “never told” disputes must go to arbitration. The principal pulls the account agreement currently used for new mutual fund and variable annuity accounts.

Exhibit: Account agreement excerpt

DISPUTE RESOLUTION
All controversies between the customer and the firm or its
representatives shall be resolved by arbitration.

The clause is not highlighted and is not immediately preceded by any disclosure explaining the effect of a predispute arbitration agreement. What is the principal’s best next step?

• A. Close the complaints as non-product-related service issues
• B. Keep using the form if the customer signed it
• C. Require reps to give a verbal arbitration explanation only
• D. Stop using the form and remediate with required disclosures

Best answer: D

Explanation: When a firm uses a predispute arbitration agreement, the customer agreement must include specific, prominent disclosure language describing the impact of arbitration (e.g., giving up the right to go to court and limits on procedures). If the required disclosures are missing or not presented as required, the supervisor should halt use of the defective form and escalate for correction and documentation before opening additional accounts with it.

Question 21

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

As the Series 26 principal, you are approving a new outbound telemarketing campaign for variable annuities using a third-party dialer. Two recent complaints allege calls were placed at 7:15 a.m. local time.

Firm WSPs require: (1) outbound calls only between 8:00 a.m. and 9:00 p.m. in the called party’s local time, (2) caller ID must display the firm name and a call-back number, and (3) the rep must provide an opening disclosure of their name, firm name, and the purpose of the call.

Which supervisory action best aligns with these cold-calling restrictions and provides evidence of compliance?

• A. Use time-zone controls, unblocked caller ID, approved script, and retained call logs
• B. Instruct reps to follow the WSPs and self-certify weekly
• C. Allow calls using area code time estimates and document only completed calls
• D. Permit blocked caller ID if reps disclose identity after the prospect engages

Best answer: A

Explanation: The strongest supervisory approach is to build preventive controls into the dialing process and retain records showing those controls operated. That means blocking calls outside the permitted local-time window, ensuring caller ID is properly displayed, using an approved opening-disclosure script, and keeping call and DNC-scrub evidence to demonstrate ongoing compliance.

Question 22

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

Which of the following changes would generally require a firm to obtain and document updated customer account information as part of maintaining a current customer profile for supervision and suitability/Reg BI purposes?

• A. Mutual fund announces a new portfolio manager
• B. Customer changes investment objective from growth to income
• C. Fund family changes the website address listed on its marketing materials
• D. Variable annuity subaccount reports a quarterly performance return

Best answer: B

Explanation: Firms are expected to maintain current and accurate customer profile information because it drives supervisory review of recommendations and the ability to demonstrate a reasonable basis for suitability/Reg BI. Changes to a customer’s investment objective directly impact what products and transactions may be appropriate, so the update should be captured and documented in the account record.

Question 23

Topic: Function 2 — Supervises Associated Persons and Oversees Sales Practices

As the Series 26 principal at an OSJ, you are reviewing a registered representative’s recommendation to a new retail customer to purchase Class A shares of a mutual fund in a brokerage account. The rep documented the share-class/breakpoint analysis and provided the fund prospectus.

Exhibit: E-delivery exception report (same day as recommendation)

Acct 7741  Retail  Recommendation: MF purchase
Form CRS delivery status: NO RECORD
Prospectus delivery status: SENT

Under the firm’s WSPs, what is the best next supervisory step before approving the recommendation?

• A. Approve if the prospectus was delivered and CRS is online
• B. Escalate to AML for a Form CRS delivery failure
• C. Hold approval; deliver Form CRS and document delivery evidence
• D. Approve now; deliver Form CRS with the trade confirmation

Best answer: C

Explanation: Form CRS is a required relationship summary for retail investors that explains the broker-dealer relationship, key fees, conflicts, and standards of conduct. When an exception report shows no delivery record, the supervisor should pause approval, ensure Form CRS is delivered promptly, and retain evidence of delivery before the recommendation is finalized.

Question 24

Topic: Function 3 — Oversees Compliance and Business Processes of the Broker-Dealer and its Offices

A broker-dealer settles a written customer complaint alleging unsuitable mutual fund switching by a registered representative. As part of the settlement review, the firm determines the event is disclosure-reportable under its CRD/U4 reporting policy and also decides the representative’s switching activity must be restricted going forward.

Which supervisory control feature best matches how the firm should implement these outcome-driven changes?

• A. Send a firmwide client notice describing the representative’s settlement and invite impacted customers to rescind trades
• B. Restrict the representative from all securities activity until the regulator confirms the complaint disposition in writing
• C. Close the complaint file after payment and address any coaching only in annual performance reviews
• D. Trigger a Form U4 amendment and place the representative on a documented heightened-supervision plan with pre-approval of switches

Best answer: D

Explanation: When a complaint outcome is determined to be disclosure-reportable, the firm must ensure the representative’s registration record is updated through the appropriate amendment process. If the same outcome identifies an ongoing conduct risk, the firm should also implement risk-based supervisory restrictions through a documented heightened-supervision plan and evidence the monitoring in its supervisory records.

Series 26 investment company principal map

Use this map after the sample questions to connect individual items to mutual funds, variable contracts, sales supervision, communications, replacements, and branch controls these Securities Prep samples test.

    flowchart LR
	  S1["Fund or variable product sales issue"] --> S2
	  S2["Review representative customer and product facts"] --> S3
	  S3["Apply suitability disclosure and replacement rules"] --> S4
	  S4["Approve communication order or account action"] --> S5
	  S5["Escalate exception complaint or trend"] --> S6
	  S6["Document principal review and controls"]

Quick Cheat Sheet

Mini Glossary

• Supervision: Firm process for review, approval, escalation, and evidence of compliance.
• Communications: Retail and institutional content subject to approval, recordkeeping, and fair-balanced standards.
• Suitability: Assessment that a recommendation fits the customer profile and the representative’s obligations.
• Product review: Understanding product structure, risks, costs, liquidity, conflicts, and investor outcomes.
• AML: Anti-money laundering controls for identifying, monitoring, and reporting suspicious activity.

In this section

• Series 26: Personnel and Registration
  Try 10 focused Series 26 questions on Personnel and Registration, with explanations, then continue with the full Securities Prep practice test.
• Series 26: Sales Practice Supervision
  Try 10 focused Series 26 questions on Sales Practice Supervision, with explanations, then continue with the full Securities Prep practice test.
• Series 26: Compliance and Business Processes
  Try 10 focused Series 26 questions on Compliance and Business Processes, with explanations, then continue with the full Securities Prep practice test.
• Free Series 26 Full-Length Practice Exam: 110 Questions
  Try 110 free Series 26 practice questions across the official topic areas, with answers and explanations, then continue with the full Securities Prep question bank.