Unit 8 Quiz Deck

Question 1

An institutional investor selects a single Financial Industry Regulatory Authority (FINRA/NYSE) member firm to provide for financing and custody of securities while orders to buy or sell are placed with executing brokers. This is an example of

Answer 1

A prime brokerage account

A prime brokerage account is one in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers.

Question 2

Which of the following would be a secondary market transaction?
1. A broker-dealer arranges for a customer to purchases an APO

2. A broker-dealer arranges for a customer to purchase mutual fund shares
3. A broker-dealer arranges for a customer to purchases an IPO
4. A broker-dealer arranges for a customer’s order to be executed on the NYSE

Answer 2

4. A broker-dealer arranges for a customer’s order to be executed on the NYSE

IPOs, APOs, and mutual fund transactions involve the issuer selling to the public, which are primary market transactions. Secondary market transactions are between investors (which is what takes place on the NYSE as well as other exchanges and the OTC market).

Question 3

A clearing corporation agent or depository for securities transactions

1. can be a bank or corporation only if they are also a broker-dealer.
2. can be a commercial bank.
3. can never be a corporation.
4. must be a broker-dealer.

Answer 3

2. Can be a commercial bank

A clearing agent can be a broker-dealer but doesn’t have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities.

Question 4

A market maker:
1. trades in a customer’s account standing ready to buy or sell at their own discretion.

2. trades in a proprietary account to facilitate trading of a security and provide liquidity.
3. can only be an institution doing proprietary trading.
4. acts as an agent to buy and sell for public customers who will hold their own securities.

Answer 4

2. trades in a proprietary account to facilitate trading of a security and provide liquidity.

Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader.

Question 5

A market in which exchange-listed securities are traded in the over-the-counter (OTC) market would best be described as
A) the First Market.
B) the Third Market.
C) the Second Market.
D) the Fourth Market.

Answer 5

B. The Third Market

Broker-dealers registered as OTC market makers in exchange-listed securities may execute transactions in the Third Market. All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for OTC trading as long as the trades are reported to the Consolidated Tape within 10 seconds of execution.

Question 6

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as:

A) a market maker.
B) an investment advisor.
C) a trustee.
D) a prime broker.

Answer 6

C. A trustee

A trustee is legally appointed to manage as a fiduciary assets in a trust.

Question 7

Carrying firms, those that carry customer accounts, must

A) maintain levels of net capital equal to or lower than noncarrying firms.

B) segregate customer funds and securities from the firms’ funds and securities.

C) not disclose its net capital if it is higher than noncarrying firms.

D) commingle customer funds and securities with the firms’ funds and securities.

Answer 7

B. segregate customer funds and securities from the firms’ funds and securities.

Carrying firms, those that carry customer accounts, must segregate customer funds and securities from that of the firm’s and because carrying customer accounts entails some inherent risk, maintain net capital higher than that which would be required for noncarrying firms.

Question 8

Which of the following statements would describe the Fourth Market?

A) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers

B) These transactions take place through electronic communications networks (ECNs) which are open during normal trading hours and act solely as principals

C) These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as principals

D) The after-hours market

Answer 8

A. A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers

The Fourth Market is a market for institutional investors in which blocks of stock trade through ECNs that are open 24 hours a day acting as agents.

Question 9

A broker-dealer designated as a clearing firm would be expected to do all of the following except

A) take custody of customer funds and securities.

B) maintain a lower net capital than noncarrying broker-dealers.

C) perform back-office functions such as sending trade confirmations to customers.

D) clear transactions for customer accounts.

Answer 9

B. maintain a lower net capital than noncarrying broker-dealers.

A firm carrying customer funds and securities assumes certain risks, and is therefore required to maintain levels of net capital higher than that of firms who do not accept custody of funds or securities (noncarrying firms).

Question 10

Carrying firms may not

A) execute transactions for their customers.

B) send trade confirmations and statements to customers.

C) clear and settle transactions for their customers.

D) mix customer funds and securities with their own.

Answer 10

D. mix customer funds and securities with their own.

Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities.

Question 11

A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is

A) a broker-dealer.
B) a transfer agent.
C) a depository.
D) a clearing agent.

Answer 11

D. a clearing agent.

A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn’t always include being able to provide the services of a clearing agent.

Question 12

All of the following are associated with being a carrying firm except

A) accepting customer funds.
B) being a fully disclosed firm.
C) accepting customer securities.
D) being able to clear customer transactions.

Answer 12

B. being a fully disclosed firm.

A carrying firm has the capability to do trade executions, clear and settle transactions, and take custody of customer funds and securities. A fully disclosed firm is one that introduces its customer business to another firm for the purpose of clearing and settling transactions.

Question 13

All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except

A) the National Securities Clearing Corporation (NSCC).

B) credit unions.

C) carrying firms.

D) the Depository Trust Company (DTC).

Answer 13

B. credit unions.

Credit unions cannot serve as a depository or clearing facility for securities transactions.

Question 14

The transfer agent for a corporation is responsible for each of the following except

A) acting as an intermediary between the buy and sell sides of a transaction.

B) canceling old and issuing new certificates.

C) maintaining records of ownership.

D) ensuring that its securities are issued in the correct owner’s name.

Answer 14

A. acting as an intermediary between the buy and sell sides of a transaction.

The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner’s name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.

Question 15

A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as

A) a clearing corporation.
B) a market maker.
C) a direct participation program.
D) a holding company.

Answer 15

B. a market maker.

Market makers are broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to FINRA that they can manage the operational and financial risk.

Question 16

A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm. Which of the following would best describe this type of firm?

A) Market making
B) Prime/executing
C) Clearing/carrying
D) Introducing/fully disclosed

Answer 16

D. Introducing/fully disclosed

A fully disclosed introducing broker-dealer is what the word implies—it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer’s funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm’s back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers.

Question 17

Anyone who, as part of their business, gives investment advice for compensation must register as

A) an agent for the issuer.
B) an underwriter.
C) a stock broker.
D) an investment adviser under the Investment Advisers Act of 1940.

Answer 17

D. an investment adviser under the Investment Advisers Act of 1940.

Broker-dealers who provide advice for a fee are subject to registration under this 1940 IA Act. Agents of investment advisers must register and pass a qualification examination.

Question 18

A corporation enlists the services of a transfer agent, who would be expected to handle all of the following functions except

A) maintaining records of shareholder ownership.
B) canceling old certificates and issuing new ones.
C) replacing lost or destroyed stock certificates.
D) filing an S-1 registration statement.

Answer 18

D) filing an S-1 registration statement.

The transfer agent for a corporation is responsible for ensuring that its securities are issued in the correct owner’s name; canceling old certificates and issuing new ones; maintaining records of ownership; and handling problems relating to lost, stolen, or destroyed certificates. It is the registrar—a separate entity—who is responsible for registering the corporation’s securities with the state.

Question 19

A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following?

A) A depository trust
B) A fully disclosed introducing firm
C) A carrying firm
D) An investment company

Answer 19

C. A carrying firm

Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities.

Question 20

Your broker-dealer executes trades for other broker-dealers and after execution settles those transactions for them. Your firm would be classified as which of the following?

A) Carrying firm
B) Introducing firm
C) Fully disclosed firm
D) Limited broker-dealer

Answer 20

A. Carrying firm

Carrying firms, or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers.