Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Which of the following is true about indications of interest?

1. They require a binding commitment

2. They are non-binding on both the customer and BD

3. They guarantee the purchase of securities

4. They are legally enforceable documents

The correct answer is: They are non-binding on both the customer and BD

Indications of interest refer to a preliminary expression of interest from a potential investor in purchasing a particular security. When someone expresses an indication of interest, it indicates that they would like to receive more information or possibly purchase the security if certain conditions are met. This is crucial because it allows the broker-dealer and the issuer to gauge demand for a security before it is officially offered to the market. The nature of indications of interest is fundamentally non-binding for both the customer and the broker-dealer. This means that while a customer may express a desire to invest, they are not contractually obligated to purchase the security, nor is the broker-dealer obliged to sell it to them. Instead, this process serves more as a tool for understanding interest levels, which can inform the pricing and allocation of the securities when they are formally offered. Since there is no legal or binding commitment involved, it allows both parties the flexibility to reconsider their positions. In contrast, the other statements involve implications that do not align with the nature of indications of interest; they suggest binding commitments or guarantees that are simply not applicable in this context. Understanding this concept is vital for working in the investment industry, as it helps clarify the dynamics between potential investors and broker-dealers when new securities are