Quick Answer
Every Series 6 recommendation carries three disclosure tracks (material aspects, control relationships, material events). Deliver the prospectus at or before confirmation and the Statement of Additional Information (SAI) on request, free of charge. Know the five core risks, the 1099-DIV return boxes, the fee caps, the gift and estate numbers, and the senior-hold framework.
The whole unit on one sheet: what to disclose, the risks and returns, the fee caps, the transfer-tax numbers, and the senior-protection framework the exam loves.
What Must Be Disclosed
- Material aspects at or before the recommendation: objective, principal risks, costs and fees, tax treatment, surrender period, liquidity.
- Prospectus: delivered at or before confirmation. A summary prospectus counts (it incorporates the full statutory prospectus by reference).
- Statement of Additional Information (SAI): delivered on request only, free of charge; home of the detailed brokerage practices and soft dollar disclosures.
- Control relationships: disclosed at or before completion of the transaction; a proprietary fund carries one by definition.
- Material events (manager change, merger, policy change, fee change) communicated through prospectus supplements (stickers), source-of-distribution notices, and proxy statements.
The Five Core Risks
- Call risk: callable bond redeemed early, forcing reinvestment at lower yields.
- Systematic risk: market-wide, cannot be diversified away (a customer worried about "the market dropping").
- Nonsystematic risk: issuer or sector specific, reduced by diversification (a customer worried about "one company failing").
- Reinvestment risk: cash flows reinvested at lower prevailing rates.
- Timing risk: buying at a peak or selling at a trough; the risk dollar-cost averaging (DCA) is designed to address.
The One-Liners That Win Points
- Diversification reduces nonsystematic risk only. Systematic risk survives a fully diversified portfolio.
- Return character flows through under Subchapter M: bond interest stays ordinary, qualified dividends stay qualified, return of capital stays return of capital.
- Return of capital is not taxable now but reduces cost basis, so the deferred tax reappears as a larger gain at sale (Box 3).
- Exempt-interest dividends sit in Box 12; the private-activity Alternative Minimum Tax (AMT) portion sits in Box 13.
- Class B converts to Class A; Class C does not convert and pays the level fee indefinitely.
- A gift carries the donor's basis forward; an inheritance steps up to date-of-death fair market value with automatic long-term treatment.
- The rep escalates; the firm evaluates and places the senior-investor hold.
Numbers to Lock In
| Item | Value |
|---|---|
| Aggregate mutual-fund sales-charge cap | 8.5% of Public Offering Price (with breakpoints, Rights of Accumulation, and reinvestment at Net Asset Value) |
| 12b-1 total fee cap | 1.00% (distribution up to 0.75%, service up to 0.25%) |
| "No-load" 12b-1 ceiling | 0.25% or less |
| Long-term-gain test (fund's holding) | more than 12 months |
| Annual gift tax exclusion (2026) | $19,000 per donor per recipient |
| Gift-split (married couple) | $38,000 per recipient |
| 529 superfunding (2026) | $95,000 single / $190,000 married per beneficiary (5-year election) |
| Unified credit / lifetime exclusion (2026) | $15,000,000 per individual (40% above) |
| Specified adult age prong | 65 or older (or 18+ with an impairment) |
| Trusted Contact Person notification | within 2 business days of a hold |
| Non-spouse inherited IRA payout | 10 years |
Memory Aid: The Senior-Hold Progression
15 → 25 → 55 business days
| Stage | Days Added | Running Total |
|---|---|---|
| Initial hold | 15 | 15 |
| Internal extension | +10 | 25 |
| Regulator-reported extension | +30 | 55 |
The plus-30 stage requires a formal report to a state regulator, agency, or court; internal review alone caps at 25.
Top Gotchas
- A municipal bond fund inside an Individual Retirement Account wastes the exemption: the account already defers tax, so the customer gives up yield for nothing.
- Long-term-gain distributions are long-term to the shareholder no matter how long they held the fund; the 12-month test is the fund's, not the shareholder's.
- The 8.5% cap is conditional, available only with breakpoints, Rights of Accumulation, and reinvestment of dividends at Net Asset Value; a Letter of Intent is a separate volume-discount tool, not one of the three.
- A non-discretionary fee-based account is a poor fit for a buy-and-hold customer; moving them there is "reverse churning."
- A 1035 exchange resets the surrender period, restarting the declining schedule.
- Tax-deferred accounts and variable annuities get no step-up; the beneficiary pays ordinary income on the gain portion.
- A specified adult is 65+ OR 18+ with an impairment; the impaired-adult prong is not age-limited. A Trusted Contact Person is a resource for the firm, never a decision-maker.
- Available funds is liquidity-available-to-invest, not net worth; home equity is not available without a mortgage transaction, and the emergency reserve stays uninvested.
One-Breath Recap
Disclose the material aspects, deliver the prospectus at or before confirmation and the SAI on request, and know the five core risks, the 1099-DIV boxes, and the fee caps cold. Gifts carry over basis while inheritance steps it up, and the senior-hold clock runs fifteen to twenty-five to fifty-five business days. Match risk to the profile and the numbers to the calendar and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Required Disclosures, Risks, and Fees unit for the complete lesson.