Series 26 common mistakes
Series 26 · Understand the traps and how to avoid them.
When a question involves a variable contract's separate account value, the candidate divides by the wrong unit count - using accumulation units to derive a payout figure (or treating annuity unit value as if it were set by the same net-asset ÷ units-outstanding arithmetic as accumulation unit value).
The two unit values are memorized as a single formula. Candidates rehearse accumulation unit value (subaccount net assets ÷ accumulation units outstanding) until it becomes the default, and never rehearse the annuity unit value step that nets out the assumed investment rate before a payment is calculated.
What to do instead
Before computing, ask: 'Is this a pre-annuitization account value or a post-annuitization income payment?' Pre-annuitization → accumulation units, straight net-asset division. Post-annuitization → annuity units, and the annuity unit value must be adjusted for the assumed investment rate (the 1 ÷ (1 + AIR) factor) and for the mortality/expense charge before multiplying by the number of annuity units. Drill five problems of each type back-to-back so the branch point is practiced, not just the formulas.
Candidate treats a variable contract as an insurance product only, so a supervision checklist or question answer omits that the separate account is registered under the Investment Company Act of 1940 as a unit investment trust and that the contract interests are securities requiring prospectus delivery.
The product is sold by insurance-licensed representatives and the word 'contract' pulls attention to state insurance law; the 1940 Act registration of the separate account is an abstraction with no visible paperwork in the sales file.
What to do instead
Build a one-line mental chain and apply it to every variable product question: separate account = registered investment company (unit investment trust) → interests are securities → prospectus must be delivered and the product is subject to FINRA rules, not just state insurance department rules. When reviewing a supervisory scenario, verify the file contains evidence of the separate-account prospectus and the underlying fund prospectuses.
Candidate answers free-look questions as though the customer has an open-ended right to cancel, or states a single universal number of days, and misses that the refund can be the greater of premium paid or account value (less credits) depending on state requirement.
Free look gets lumped together with generic cancellation/ref охолодження rights, and candidates study the minimum rather than the structure - which party bears the investment loss during the free-look window.
What to do instead
Learn the structure, not just a number: the free-look period is set by state law with a minimum (commonly 10 days, longer in some states and for replacements), so the exam answer must reflect the state minimum or the contract's longer provision. Confirm the refund basis stated in the prospectus (premium paid, or account value if greater). On any scenario question, look for the state requirement and the contract's own terms before selecting a period.
On a replacement or 1035-exchange scenario, the candidate approves (or says the principal may approve) the transaction without the required principal review and sign-off, or assumes the representative's suitability determination is sufficient on its own.
Exchanges feel administrative - the money stays tax-deferred and the customer signs - so the principal-approval step is overlooked in favor of checking paperwork completeness.
What to do instead
Fix the sequence in memory for deferred variable annuity purchases, including exchanges: representative documents suitability, then a principal reviews and approves the purchase within 7 business days of the representative's determination, and the review must address surrender charges on the replaced contract, new surrender period, loss of existing benefits, increased fees, and whether the customer would benefit from the exchange. On any replacement question, ask first: 'Has the principal actually reviewed and approved, and is the approval documented?'
Candidate approves a large mutual fund purchase at the sales charge shown on the order without testing whether a breakpoint, letter of intent, or rights of accumulation would have reduced the charge, and does not flag the missed discount in the review.
Breakpoint math is arithmetic the candidate avoids under time pressure, and the order ticket shows a plausible percentage, so nothing looks wrong on the surface.
What to do instead
Make three checks automatic on every fund purchase scenario: (1) does the dollar amount reach the next breakpoint; (2) could a letter of intent - which can be backdated to cover prior purchases per the prospectus - or existing holdings under rights of accumulation lift the customer over the breakpoint; (3) is the share class appropriate for the holding period and fee profile. Write the three checks on scratch paper at the start of the exam and apply them to every sales-charge item.
Candidate permits marketing language that calls a fund 'no-load' or 'free' when the share class carries a contingent deferred sales charge or an asset-based (12b-1) sales charge above the permitted threshold, or omits that a service fee is being paid.
The term is treated as a general compliment rather than a defined regulatory term, and the candidate reviews the flyer for tone and omissions instead of reconciling it against the actual share-class fee table.
What to do instead
Treat 'no-load', 'no sales charge' and 'free' as defined terms requiring verification: pull the specific share class's fee table and confirm no front-end load, no CDSC, and that the asset-based sales charge does not exceed the permitted limit (a 12b-1 fee of up to 0.25% is generally compatible with 'no-load' treatment). If the class has a CDSC or a higher 12b-1 fee, the language must change or carry clear disclosure. Note the pricing date of any performance shown as well.
Candidate reviews only formal printed sales literature and seminar invitations, and lets representative-generated emails, text messages, social media posts and independently produced flyers go unreviewed on the theory that they are 'correspondence' and need no principal pre-approval.
The candidate equates 'advertising' with pieces that look designed, and correspondence is remembered as the low-risk category that only needs review after the fact - so anything that resembles a personal message is filed without scrutiny.
What to do instead
Use the two-question sort: is it sent to more than 25 retail investors within any 30-calendar-day period, or is it a form of retail communication (any published or broadcast material, including websites and social media)? If yes, it is a retail communication requiring principal pre-approval before use; only genuinely individualized, non-form correspondence may be reviewed after use by qualified supervisory personnel. Also check whether the piece must be filed with FINRA given the type of communication and the products involved.
Candidate assumes that once a branch manager, compliance analyst or delegate has signed off, the principal's supervisory obligation is discharged, and writes procedures in which follow-up on a red flag (e.g., a complaint, an unusual concentration, an unapproved outside activity) is never documented or escalated.
Supervision is confused with delegation. The candidate reasons that someone reviewed it, which feels like supervision, and does not check whether the firm's written procedures assign responsibility, set escalation triggers, and create a record.
What to do instead
Answer supervision questions from the principle that a principal may delegate tasks but not responsibility: the firm must have written supervisory procedures, the principal must know who is responsible for each step, red flags must be escalated and the escalation documented, and the principal must be able to show the review occurred. When a scenario shows a signature but no evidence of analysis or follow-up, look for the answer that requires documented review and escalation.
Candidate applies a single retention period to every record - usually three years - and cannot distinguish which records must be kept longer or which must be maintained in an easily accessible place for the first two years.
One number is memorized and reused, and no mental table distinguishes categories of records (blotters and ledgers versus communications versus account records).
What to do instead
Memorize by category instead of one blanket number: books and records generally six years with the first two in an easily accessible place; communications with the public generally three years. When a question supplies a record type, name the category out loud before choosing a period. Rebuild the table from scratch once a week until it can be written from memory.
Candidate approves a business gift over $100 to a single recipient in a year, or permits a sales contest, bonus or non-cash incentive tied to the sale of investment company or variable contract products, treating it as ordinary sales motivation.
Gifts and contests are normalized as relationship-building, and the candidate evaluates them for business appropriateness rather than against the per-person annual gift limit and the restrictions on non-cash compensation for these products.
What to do instead
Run two tests before approving anything of value: (1) gift - is it over $100 to the same person in a calendar year (limit under FINRA Rule 3220), and does the firm's own stricter policy apply; (2) non-cash compensation - is it tied to sales of investment company or variable products, where production-based contests and non-cash incentives are restricted or prohibited, with permitted items limited to occasional meals/entertainment and training or education that is not conditioned on sales targets. If either test fails, the answer is to decline or restructure.