Chapter 18/19/20

Question 1

True or false: To initiate registration w/ FINRA, a person must file a U-4?

Answer 1

True

Question 2

How long do people who file U4s have to file amendments?

Answer 2

30 days

Question 3

True or false: The failure to provide complete disclosure of facts and circumstances on the U4 could potentially result in a person being barred from the securities industry?

Answer 3

True

Question 4

Abritration Disclosures

Answer 4

When signing a U4, a person agrees to use arbitration as the process for resolving disputes that involve his employer, other member firms and associated persons, and customers.

Question 5

Disclosures that a member firm must make w/ arbitration:

Answer 5

1. Agreement to arbitrate, which means you are giving up the right to sue a member, customer, or another associated person in court
2. A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated
3. A dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated
4. Arbitration awards are generally final and binding; a party’s ability to have a court reverse or modify an arbitration award is very limited.
5. The ability of the parties to obtain documents, witness statements, and other discovery is generally more limited in arbitration than in court proceedings.
6. The arbitrators are not required to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all parties to the panel at least 20 days prior to the first scheduled hearing date.
7. The panel of arbitrators may include private arbitrators (people who were previously involved w/ the securities industry) or public arbitrators.
8. The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that’s ineligible for arbitration may be brought in court.

Question 6

Process a disqualified person may take to rejoin the securities industry

Answer 6

The disqualified person may apply for a waiver from an SRO, but the waiver can only be granted in an elibility proceeding. If the SRO grants the waiver, it must notify the SEC. Ultimately, the SEC has the authority to overturn the waiver. If the SEC allows the person back in, they are subject to heightened supervision.

• Generally, a prospective employee who is subject to disqualification may not associate with a FINRA member in any capacity unless/until the waiver is granted.
• If a person is currently employed by the member when the disqualifying event occurs, she may be permitted to continue to work in a limited capacity pending the outcome of the Eligibility Proceeding.

Question 7

Review of new hires

Answer 7

Firms must perform a background check within 30 days after the U4 was filed to ensure U4 info is accurate.

Question 8

Central Registration Depository (CRD)

Answer 8

An automated database that contains information concerning the employment and disciplinary histories of registered persons. Data can be expunged if info is false. Once deleted, the info is gone forever.

Question 9

Form U5

Answer 9

After a registered person resigns or is terminated from a member firm, the firm is required to notify FINRA within 30 days on Form U5. An employee must also be given a copy of this form. This form includes the reason and details of the departure.

Even after termination, FINRA maintains jurisdiction over any associated persons previously employed by the broker-dealer for two years. For this reason, a person who terminates her registration, but wants to return to a brokerage firm as a registered representative without having to requalify by examination, must do so within a two-year period. However, if any registered persons apply under the previously referenced Maintaining Qualifications Program (MQP), they’re given five years before being required to requalify.

Question 10

True or false: If a broker-dealer receives a written customer complaint after the RR has left the firm, the firm is no longer required to notify FINRA?

Answer 10

False, if a broker-dealer receives a written customer complaint after the RR has left the firm, it’s still required to notify FINRA regardless of how long ago the RR had left the firm. There’s no requirement to send a copy of the complaint to the RR.

Question 11

Form U6

Answer 11

Regulators, states, and/or jurisdictions use Form U6 to report disciplinary actions against registered representatives and/or firms. Any arbitration awards are also listed here.

Question 12

BrokerCheck

Answer 12

FINRA’s public disclosure program and provides info about the disciplinary history of member firms or registered representatives. The system provides info on individuals who are currently registered or have been registered within the last 10 years.

Question 13

What can person do if they disagree with info on BrokerCheck

Answer 13

If currently registered: File an amended U4

If previously registered: submit a Broker Comment Request Form with FINRA to provide an update or add context to the info

Question 14

FINRA’s Investor Education and Protection Rule

Answer 14

requires member firms, at least once every calendar year, to provide to each customer, in writing (which may be electronic), the following:
* BrokerCheck hotline
* FINRA website address
* A brochure regarding BrokerCheck

Question 15

MSRB Investor Education Rule

Answer 15

MSRB requires the following disclosures be made annually:
* That the regulated entity is registered with the MSRB and the SEC
* MSRB website
* A brochure regarding the MSRB

Question 16

FINRA complaint

Answer 16

Anytime a customer or representative of a customer files a grievance w/ a member firm in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer. The supervising principal’s responsibility is to review and initial the complaint. Member firms must maintain all complaints for 4 years. Response to the comlpaint can be written or oral.

• Member firms may be required to file a report with FINRA regarding certain customer complaints and other incidents that may arise. If the reporting requirement is triggered, a member firm must report these events promptly, but by no later than 30 calendar days after learning of them.

Question 17

When must a complaint be filed w/ FINRA:

Answer 17

• Allegations of theft or forgery
• Violation of any securities law or reg.
• A person was denied registration or expelled.
• A domestic body or SRO alleges violation of law or reg.
• Any felony or bad misdameanor
• When a director, controlling stockholder, partner, officer, or sole proprietor of, or an associated person with, a broker-dealer, investment company, investment advisor, underwriter, or insurance company has their registration denied or revoked.
• When a person/firm is involvev as a defendant or respondent in any securities or commodities-related civil litigation or arbitration- that resulted in an award or a settlement of more than $15,000 (for any associated persons) or more than $25,000 (for member firms)
• When a person is the subject of any action taken by the member firm against an associated person of that firm that results in a suspension, termination, withholding of commissions, or the imposition of fines in excess of $2,500

Question 18

True or false: FINRA members are required to provide FINRA with statistical and summary information about customer complaints on a quarterly basis, even if the complaint doesn’t trigger the preceding reporting requirement. The report is due on the 15th of the month following the end of the calendar quarter in which the complaints were received. However, if no complaints were received during the quarter, no report is required to be filed?

Answer 18

True

Question 19

What must a supervisor do when identifying a red flag?

Answer 19

1. Investigate the situation
2. Document the situation
3. Pursue the investigation to a conclusion

The employee’s prior conduct should always be taken into account.

Question 20

Selling away

Answer 20

When an employee of a member firm makes private transactions w/o first notifying their employer.

• Personal transactions involving investment company and variable annuity securities are not covered by this rule.
• If the associated person will receive compensation for the transaction, the member must specifically approve the transaction in writing for the person to be permitted to participate. In this case, the transaction must be recorded on the member firm’s books.
• If the associated person will not receive compensation for the transaction, the employee is still required to provide written notification to her employer.

Question 21

Gift limit rule

Answer 21

FINRA member firms and their associated persons may not provide gifts that exceed $100 per year to any person of another firm if the payment is business-related.

Generally, a gift should be valued at the greater of its cost or its market value at the time it was given. If a gift is given to a group, a pro rata amount is deemed to have been given to each of the individuals.

This rule does not apply to gifts a firm makes to its own employees

Question 22

Personal, De Minimis, Promotional, or Commemorative Gifts

Answer 22

Personal gifts or gifts of very low value (De Minimis (ex: a pen)) do not apply to the gift limit rule.

Question 23

True or false: Business entertainment expenses apply to the gift limit rule?

Answer 23

False, as long as an employee of the member firm is present at the evenet, it’s not considered a gift. However, if an employee of the event is not present, it’s a vioation

Question 24

Member Compensation Related to the Sale of Securities Products

Answer 24

Broker-dealers that create investment companies (e.g., mutual funds) may not pay other broker-dealers a commission in the form of securities (e.g., stocks and/or options). RRs are NOT allowed to receive compensation for the sale of direct participation programs.

ex: an RR cannot accept compensation directly from a mutual fund distributor for selling its funds. Instead, the distributor should make payments to the RR’s broker-dealer, which then determines the RR’s compensation.

Question 25

True or false: Cash compensation includes any discount, concession, commission, service or other fee, asset-based sales charge, loan, override, or cash employee benefit received in connection with the sale and distribution of DPPs, REITs, investment company or variable contract securities?

Answer 25

True, RRs may only accept De Minimis gifts.

Question 26

The Training and Education Exception

Answer 26

FINRA permits firms to pay or reimburse other firms for meetings that serve an educational function. ## Footnote * RRs must have their broker-dealer’s permission to attend the meeting. * Attendance may not be tied to the achievement of a sales target. * The location of the meeting must be appropriate. * Payments or reimbursements for guests of RRs, such as spouses, are not permitted.

Question 27

Rule G-37

Answer 27

Applies to any political contribution (cash or non-cash). G-37 applies municipal finance professionals: associated persons of a broker-dealer who primarily engage in underwriting, trading, sales, financial advisory or consulting services, and research or investment advice related to munis. RRs who simply recommend municipal securities to retail investors are generally excluded. Any representative who solicits municipal securities business from issuers is considered an MFP. If a municipal securities broker-dealer makes certain political contributions to officials of issuers, it’s prohibited from engaging in negotiated municipal securities business with that issuer for two years. However, MFPs of the broker-dealer may make certain contributions without triggering the two-year ban. No violation occurs for MFPs is the MFP is entitled to vote and doesn't exceed $250 of contributions per election.

Question 28

What happens if an MFP triggers the 2 year ban but then leaves the frim?

Answer 28

The ban remains in place. If that MFP is hired at a new firm and is still defined as an MFP, the new firm will also be prohibited from engaging in negotiated municipal securities business based on the date of the contribution. However, if the MFP is hired at a new firm and is not defined as an MFP, the two-year ban doesn’t apply to the new firm.

Question 29

What happens if an MFP contributes $200 to a candidate while working at firm A, but then leaves to firm B and contributes another $200 in a short time-span?

Answer 29

The two-year ban will only apply to Dealer B.

Question 30

What happens if a person makes a $200 political contribution before working as an MFP but then becomes an MFP?

Answer 30

A two-year look-back period applies to MFP contributions. If an individual is not an MFP, but she made contributions to a political candidate that would have resulted in a violation, the firm that employs the individual would be subject to the underwriting ban if she’s employed in the role of an MFP within two years of the contribution.

Question 31

What happens if a contribution to a politician is made from a joint account?

Answer 31

The contribution will be split evenly by the contributors and the contribution limit applies. Therefore, if the check from the joint account exceeds $500, a violation occurs. On the other hand, if the check is signed only by the MFP, the entire amount is attributable to the MFP.

Question 32

Gross National Product (GNP)

Answer 32

GNP measures the total value of all of the goods and services that are produced by a national economy. For the U.S., GNP includes the goods and services being produced overseas by a U.S. company.

Question 33

Balance of Payments (BOP)

Answer 33

how economists measure the payments coming into and going out of a country. There are two parts to the balance of payment:1) the current account and 2) the capital account. Among other things, the current account measures the balance of trade for the year. The capital account focuses on net changes in ownership of assets.

Question 34

Equities as an inflation hedge

Answer 34

Historically, equity securities or other related products, such as equity mutual funds, equity ETFs, and variable annuities, have provided the best protection against inflation. Securities which provide payments that are set at the time of issuance and remain unchanged regardless of the inflation rate are most susceptible to inflation risk (also referred to as purchasing-power risk).

Question 35

True or false: Commodities perform well during inflationary periods?

Answer 35

True

Question 36

True or false: Fixed income products are less vulnerable to inflation compared to equities?

Answer 36

False, fixed income products are more vulnerable to inflation. Inflation actually represents a dual risk for bondholders—(1) rising interest rates will cause the market prices of their holdings to fall, and (2) the purchasing power of their interest payments will decrease. ## Footnote * If inflation is anticipated, investors will attempt to shorten the duration of their bond portfolio and/or purchase TIPs.

Question 37

Real interest rate

Answer 37

The bond’s yield minus the inflation rate.

Question 38

Leading indicators

Answer 38

* New orders for consumer goods/materials * Stock prices: S&P 500 * New building permits issued

Question 39

Coincident Economic Indicators

Answer 39

* Employees on non-agricultural payrolls * Personal income minus transfer payments (ex: unemployment) * The Index of Industrial Production * Manufacturing & trade sales

Question 40

Lagging indicators

Answer 40

* Avg duration of unemployment * Ratio of manufacturing and trade inventories to sales * Change in labor cost per unit of output for manufactured goods * The average prime rate charged by banks * Commercial and industrial loans outstanding * Ratio of consumer installment credit to personal income * Change in the Consumer Price Index for services

Question 41

Call Rate

Answer 41

What commercial banks charge on collateralized loans to broker-dealers (for margin purposes). ## Footnote * From lowest to highest, the usual order of these rates is—the fed funds rate, the discount rate, the call rate, and the prime rate.

Question 42

Classifications of common stock

Answer 42

Large cap: > $10bn Mid-cap: Between $2bn and $10bn Small-cap: Between $300MM and $2bn Micro-cap: Between 50MM and 300M Nano-cap: <50MM

Question 43

Yield curves

Answer 43

During periods of easy money when interest rates are declining, yields on short-term debt securities will be lower than those on long-term debt securities. Yield curves will tend to slope upward from the shorter to the longer maturities (i.e., a normal yield curve). On the other hand, during periods of tight money, the yield curve may invert. This means that short-term interest rates will be higher than long-term rates.

Question 44

Measures of money supply

Answer 44

M1 = currency in circulation + demand deposits + other checkable deposits M2 = M1 + MMDAs + savings + balances at funds + REPO agreements at banks ## Footnote * Each week the FRB compiles and publishes figures on the size of the money supply according to the M1 measure. On a monthly basis, the FRB publishes figures on M2.

Question 45

Tools of the Fed

Answer 45

1. Setting the discount rate 2. Open market operations 3. Reserve requirements 4. Moral suasion 5. Setting margin requirements ## Footnote * Although the FRB doesn’t directly set the fed funds rate, it does set a target or range. The FRB’s open market operations are designed to maintain the fed funds rate within this prescribed target.

Question 46

Open market operations

Answer 46

Open market operations typically involve the purchase and sale of U.S. government securities—primarily Treasury bills. However, the FRB also trades government notes and bonds. These trades are executed through primary government dealers, which are the nation’s largest banks and brokerage firms that have been appointed by the FRB.

Question 47

True or false: The Fed will enter into Repo agreements

Answer 47

True, to purchase U.S. government securities at a fixed price from dealers with provisions for their resale back to the dealer at the same price plus a negotiated rate of interest. When the FRB executes a repo, it’s lending money and, therefore, increasing bank reserves (an easing of the money supply). The Fed will also use reverse repos for quantitative tightening.

Question 48

The Fed's impact on margin requirements

Answer 48

The Securities Exchange Act of 1934 provided the Federal Reserve Board with the power to determine the amount of credit that may be extended to purchase securities. By increasing margin requirements, the FRB reduces the amount of money that brokers and banks may lend, causing the money supply to tighten. Changing the margin requirement is the least effective method the FRB has to control credit since it affects only securities market transactions.

Question 49

How the Fed uses moral suasion

Answer 49

There are times when the FRB attempts to influence bank lending policies through moral suasion. The FRB exerts its influence through the public media or through the examiners who are sent to member banks.

Question 50

Spot rate

Answer 50

The current value of a base currency compared to a counter currency. The spot rate is for immediate delivery.

Question 51

True or false: When U.S. interest rates are high, the dollar is getting weaker?

Answer 51

False, stronger

Question 52

During a trade deficit, what will happen to the dollar?

Answer 52

To correct a trade deficit, the dollar should weaken, which will cause U.S. goods to become cheaper (more competitive) abroad and foreign goods to become more expensive in the United States. This leads to more U.S. exports and fewer U.S. imports, which should help to alleviate the trade imbalance.

Question 53

True or false: Essentially, U.S. importers (and consumers) prefer a strong dollar, while U.S. exporters (producers) prefer a weak dollar?

Answer 53

True

Question 54

Investment risk

Answer 54

The likelihood that an investor loses money.

Question 55

Systematic risk

Answer 55

Non-diversifiable risk. This is caused by factors that affect the prices of virtually all securities (ex: wars, recessions, etc.)

Question 56

Types of systematic risk

Answer 56

1. Market risk- day-to-day potential of losses due to market fluctuations. 2. IRR: Primarily affects bondholders. If rates rise, new investors won't be interested in buying existing bonds at par ($1,000) due to the fact that they can obtain higher yields by purchasing newly issued bonds with higher coupon rates. For that reason, the prices of existing bonds will need to be lowered to attract purchasers. 3. Inflation risk: The risk that investments that provide fixed payments will lose their purchasing power. 4. the risk that a significant event will cause a substantial decline in the market value of all securities

Question 57

Beta

Answer 57

Measures the amt of systematic risk

Question 58

True or false: Building a diversified bond portfolio comprised of bonds from different issuers with different coupon rates, maturity dates, and geographic locations will provide protection against IRR?

Answer 58

False, since all bonds have some exposure to interest-rate risk, it’s considered systematic or non-diversifiable.

Question 59

Duration

Answer 59

measures the bond's sensitivity to interest rate changes. Bonds with longer maturities tend to be more vulnerable to IRR. Ex: If a bond’s duration is 10 years, a 1% increase in interest rates will cause a 10% decrease in the bond’s price.

Question 60

True or false: Historically, equity securities, variable annuities, investments in real estate, or precious metal have provided the best protection against inflation?

Answer 60

True

Question 61

Real rate of return

Answer 61

Invesment return - inflation

Question 62

Unsystematic risk

Answer 62

Risk that can be diversified

Question 63

Alpha

Answer 63

Measures the risk that’s specific to a particular company. Calculation: Actual return - expected return (beta)

Question 64

Types of unsystematic risk

Answer 64

1. Business risk 2. Regulatory risk 3. Legislative risk 4. Political risk: changes in a country/state/municipality's politics might affect a firm 5. Liquidity risk 6. Opportunity cost 7. Reinvestment risk: the risk that an investor will not be able to reinvest their principal at the same interest rate after a bond matures or is called (may happen if rates decrease). 8. Currency (exchange rate) risk: the possibility that foreign investments will be worth less in the future due to changes in exchange rates. 9. Capital risk 10. Credit risk 11. Call risk 12. Prepayment risk

Question 65

Strategic asset allocation

Answer 65

Allocating assets into an optimal portfolio based on a client’s risk tolerance and investment objectives

Question 66

Buy and Hold strategy

Answer 66

A passive investment strategy where an investor buys securities and holds them for a long period regardless of fluctuations in the market. Transaction costs and tax consequences are minimized since there’s no selling or purchasing of assets. One issue is that the asset allocation may drift to where it is no longer compatible w/ the client's risk tolerance. ## Footnote * This strategy assumes that markets are efficient.

Question 67

Portfolio Rebalancing

Answer 67

Involves a process of buying and selling assets on a periodic basis. Through rebalancing, the original strategic asset allocation—and its risk/reward characteristics—may be restored. ## Footnote * This strategy assumes that markets are efficient.

Question 68

Tactical Asset Allocation

Answer 68

When investors believe the markets are no perfectly efficient so they look to outperform indexes.

Question 69

Sector rotation

Answer 69

An active investment strategy that involves moving money from one industry to another in an attempt to beat the market.

Question 70

Dollar cost averaging

Answer 70

The practice of investing a fixed dollar amount on a regular basis, regardless of the share price. This technique is designed to take the emotion out of the investment process and accepts that markets are subject to erratic swings.

Question 71

How can an investor hedge a long position in a stock?

Answer 71

By purchasing a put option which provides protection against a possible decline in the value of the stock. This gives the investor the right to sell the stock at the option’s strike price if the stock declines in value.

Question 72

How can an investor hedge a short position in a stock?

Answer 72

By purchasing a call option to protect against a potential increase in the value of the stock. This gives the investor the right to buy the stock at the option’s strike price and to use the acquired stock to cover the short position.

Question 73

Currency options

Answer 73

Currency options allow investors to take a position based on the value of a foreign currency as it compares to the U.S. dollar. These contracts are U.S. dollar-settled, which means that there’s no delivery or receipt of a foreign currency if the option is exercised.

Question 74

A U.S. company is purchasing goods from a German company and will ultimately need to pay for the goods in euros. In order to protect itself from a stronger euro, the U.S. company may:

Answer 74

The best option would be to buy Euro calls. This will lock in the price that the firm will pay for the Euro, and then if the value rises they can sell for more money. Although selling euro puts will offer some protection, the amount of protection is limited to the premium received on their sale.A previously registered person was convicted of a felony 14 years ago and has served out his sentence in federal prison. If he's now seeking employment as a registered representative, he should be informed that: