SIE

Answer 1

An execution at the quote means a buy order is executed at the national best offer and a sell order is executed at the national best bid.

Answer 2

Open-end funds, or mutual funds, will redeem their shares from investors, but closed-end funds do not issue redeemable shares

Answer 3

UGMAs and UTMAs are custodial accounts established for the benefit of a minor. The adult that makes the gift (the donor) may name someone else as custodian of the account. There is no annual limit on the size of the gift, although gift tax may apply if the gift exceeds the annual gift limit. There may be only one custodian and one minor per UGMA or UTMA accounts.

Answer 4

When the assets of the separate account of an insurance company are managed by the insurance company’s investment company, the account is registered as an open-end investment company. When the investment management of the insurer passes the responsibility of management to subaccount fund managers the separate account must be registered as a unit investment trust.

Answer 5

It is permitted to include a price target in retail communications, provided it is contained in a research report. They cannot predict or project performance, imply that past performance projects future results, or include exaggerated claims.

Answer 6

The stock is purchased for $5,700 and sold for $6,000. In addition, the customer received a premium of $400 for writing the call. The investor has a profit of $700.

Answer 7

A firm’s anti-money laundering program must be tested annually by an independent person who is knowledgeable about the Bank Secrecy Act provisions which apply. Although the person responsible for the testing must be independent, the person is not required to be employed outside the firm. The person, however, cannot report to the anti-money laundering compliance officer of the firm.

Answer 8

SEC Rule 145 is designed to protect shareholders of a company that proposes to reclassify its ownership structure. This is to ensure that all necessary disclosures are made and provided to shareholders.

Answer 9

Rule 147 offers an intrastate offering exemption from Section 3(a)(11) of the Securities Act of 1933.

Answer 10

Under a Tenancy in Common (or Joints Tenants in Common account), each owner has a specified percentage of the entire account. At each owner’s death, his/her portion of the account is liquidated and distributed to his/her beneficiary.

Answer 11

The investment manager of a hedge fund stands to earn both management fees as well as performance fees.

Answer 12

FINRA generally requires that general securities firms have a minimum of two principals. They must also have access to a Financial and Operations Principal.

Answer 13

The calculation of NAV of a closed-end fund is the same as for mutual funds: NAV = Fund Asset – Fund Liabilities/number of outstanding shares. The price at which shares are bought and sold is established by supply and demand through exchange trading, and may be higher or lower than the NAV.

Answer 14

There are no required minimum distributions from a Roth IRA, during the account owner’s lifetime.

Answer 15

More money is available when credit is eased or the money supply grows. This results from a decrease in the discount rate, or much less frequently, a decrease to the reserve requirement. If either of these decreases, banks have an increase of reserves that are available for lending.

Answer 16

A broker, dealer, or municipal securities dealer that enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities is defined by MSRB rules as a financial advisor.

Answer 17

Although units are designed to be held until the termination of the trust, investors can sell their units back to the trust on any day that the market is open

Answer 18

Mutual fund shares are issued through a continuous primary offering, which means shares are available when investors want to purchase them. Closed-end company shares are limited because there is a fixed pool of capital. ETFs are traded on exchanges, mutual fund are not.

Answer 19

Commingling is prohibited because it may place customer securities at risk. If the broker-dealer were to default on a loan, creditors would have access to customer securities to satisfy these claims.

Answer 20

FINRA’s BrokerCheck is accessible to customers, and allows them to review reports about broker-dealers and representatives, including information about regulatory matters and incidents.

Answer 21

General partners actively manage the business and have unlimited liability for its debts and obligations. Limited partners may not actively participate in management.

Answer 22

A firm commitment is an underwriting agreement in which the underwriters have obligation to buy the securities that are not purchased by investors. These agreements are the most common types of corporate underwritings.

Answer 23

The writer of the option received $725 from the sale of the call. The exercise of the call requires the writer to sell the stock at the strike price, so the writer of the call makes $8,400. However, the writer has to buy the stock to have it available to sell (the investor had no other positions). Buying the stock at the current price of $8,700 results in a $425 gain. (Paid $8,700, received $9,125).

Answer 24

Growth-focused investors seek capital appreciation over time, meaning the increase in value of their portfolio.

Answer 25

Firms must designate two associated persons as emergency contacts. If these people or their contact information changes, FINRA must be notified promptly (within 30 days).

Answer 26

A blind pool hedge fund permits the fund manager to make the determination of how assets will be invested. The investments that will be made are not disclosed.

Answer 27

The portfolio of a UIT is well suited to bond investments because of their termination dates, although there are many equity trusts. Today more assets are generally directed to UIT equity trust than bond trusts. The securities for the UIT portfolio are selected and held; they are not actively traded.

Answer 28

Bonds that trade flat do not include accrued interest in their settlement price. This could be because the issuer is in default and interest is not being paid, or because the bond is settling on an interest payment date. "And interest" means that accrued interest is included in the settlement price.

Answer 29

A selected dealer agreement specifies the terms between the managing underwriter and the selling group members. Selling group members act as agents because they have no financial responsibility for unsold securities. Distributions subject to a selected dealer agreement include both registered and exempt securities (e.g. municipal bonds).

Answer 30

The investments with the greatest call risk vulnerability are callable bonds and callable preferred stock. The best strategy for mitigating this risk is to purchase non-callable securities.

Answer 31

When a country is running a trade surplus (exports exceed imports), the country's currency will strengthen relative to other country's currency. The opposite will occur with a trade deficit.

Answer 32

When a country is running a trade surplus (exports exceed imports), the country's currency will strengthen relative to other country's currency. The opposite will occur with a trade deficit.

Answer 33

Parking a registration occurs when a broker-dealer sponsors an individual for a FINRA qualification exam and that person is not employed by the firm.

Answer 34

For any IRA contribution made between January 1 and April 15, the taxpayer must designate which year the contribution is for - the year past or the current year.

Answer 35

The MSRB suitability rule does not include a provision for issuer related suitability.

Answer 36

This type of conduct is allowed, provided a written contract is in place, describing the full extent of the arrangement. It is formally known as the Continuing Commissions policy.

Answer 37

A non-account holder can only trade on behalf of the owner of an individual brokerage account with written trading authority. There are no exceptions.

Answer 38

A Treasury receipt is a zero-coupon bond created by a broker-dealer using the cash flows from Treasury securities.

Answer 39

FINRA requires that all broker-dealers establish anti-money laundering programs without exception. Training is required for all appropriate personnel, which are those persons who could come into contact or should be knowledgeable about the detection and reporting of possible anti-money laundering activity.

Answer 40

Coverdell Education Savings Accounts (ESAs) are designed for a child's education funding. Like 529 plans, they use after-tax contributions but offer tax-deferred account growth, and tax-free distributions when used for education.

Answer 41

The stock is sold short for $7,200. To protect the position the investor buys a call for $150. The call is exercised when the market price of the stock rises, so the investor buys the stock to cover the short position for $7,500. The customer received $7,200 from the short sale, but paid a total of $7,650 (premium + stock purchase price) for a loss of $450.

Answer 42

Custody is the Operations Department function that receives securities and ensures their safekeeping.

Answer 43

Covenants are provisions in credit agreements and indentures intended to protect against the deterioration of the borrower/issuer's credit quality. They govern specific actions that may or may not be taken during the term of the debt obligation. Failure to comply with a covenant may trigger an event of default, which allows investors to accelerate the maturity of their debt unless amended or waived. There are three primary classifications of covenants: affirmative, negative, and financial.

Answer 44

FINRA monitors, reviews and approves broker-dealers' sales literature and advertising.

Answer 45

Seniority refers to the priority status of a creditor's claims against the borrower/issuer relative to those of other creditors.

Answer 46

A complaint is subject to FINRA filing requirements only if it is a written allegation of complaint against a representative.

Answer 47

As the price of a bond decreases, or trades at a discount, both the current yield (CY) and the yield-to-maturity (YTM) will be greater than the nominal yield (NY). The CY represents the annual interest as a percentage of the current market price, so will increase as the market price falls. The YTM will reflect the capital gain received at maturity that is created from the bond being purchased at a discount and maturing at par. The nominal yield represents the coupon on the bond. It is fixed over the lifetime of the bond.

Answer 48

A company seeking to avoid registration in the U.S. and targeting accredited investors would issue securities via a Regulation D private placement. Regulation D private placements can be sold to an unlimited number of accredited investors and, for deals in excess of $5mm, up to 35 non-accredited investors. This type of offering would allow the issuer to avoid filing an SEC registration statement.

Answer 49

When a bond is trading at a discount (market price lower than par value), the YTM will be the highest yield and the nominal yield the lowest yield.

Answer 50

A call is always at the option of the issuer, never the investor. Normally, a call feature creates extra risk by shortening the investor's holding period, especially in times of falling rates. Issuers may agree to pay an additional price (call premium) above par for the call option.

Answer 51

FINRA rules require member firms acting as a principal or dealer buy and sell securities with a fair and reasonable mark-up or mark-down, after taking into account all relevant circumstances. Likewise, when member firms act as an agent or broker they must charge fair and reasonable commissions. The general guideline is that a mark-up/mark-down or commission in excess of 5% is not reasonable.

Answer 52

FINRA rules require member firms acting as a principal or dealer buy and sell securities with a fair and reasonable mark-up or mark-down, after taking into account all relevant circumstances. Likewise, when member firms act as an agent or broker they must charge fair and reasonable commissions. The general guideline is that a mark-up/mark-down or commission in excess of 5% is not reasonable.

Answer 53

When a customer requests the broker-dealer's financial information, the broker-dealer is required to provide only it's most recent balance sheet.

Answer 54

If a Roth distribution is taken after age 59 ½, it is non-qualified and taxable if it has not been held at least five years. But it will not be subject to a 10% penalty. If it is used to buy a first home, only the first $10,000 avoids the 10% penalty. If it is taken after a five-year holding period but before 59 ½, it is not qualified and a penalty applies. Rollovers from Roths to Traditional IRAs are not allowed.

Answer 55

Registered reps have a suitability obligation to their customers, not a fiduciary responsibility.

Answer 56

Interest rate risk is increased by long maturities and low coupons. Long-term zero-coupon bonds are the most vulnerable to interest rate risk.

Answer 57

The Securities Exchange Act of 1934 defines insiders as corporate directors, officers, or stockholders owning more than 10% of a firm's shares.

Answer 58

The investor loses money on the stock when the market price falls. But, the long put allows the investor to sell the stock at 62. Thus, the investor can lose $2 per share on the stock, plus the premium of $1.50 that was paid for a total of $3.50 per share. 200 shares x $3.50 = maximum loss of $700.

Answer 59

Investors are usually able to place orders to buy or sell as few as one share of an ETF. Broker-dealers may impose dollar or share minimums on ETF purchases but most do not.

Answer 60

It is not unlikely for shares of closed end funds to trade at prices of 10 – 20% above or below NAV.

Answer 61

When the customer purchased the bond the YTM was greater than the nominal yield. This means that the bond was purchased at a discount as the investor will realize a capital gain upon maturity. Interest rates and bond prices move in opposite directions, so when interest rates decrease to 4% the price of the 5% bond will increase as it has a higher coupon and is more attractive to investors. The customer will then be able to sell the bond at a premium.

Answer 62

A broker-dealer's watch list and restricted list should each include: * the date and time the security was added to or deleted from the list; * the name of a contact person who could answer questions about the addition or deletion.

Answer 63

Because the investor is interested in fixed income securities, a bond portfolio is appropriate. Junk bonds offer high yield potential, but with substantial risk because the bonds within the portfolio can include debt securities of untested companies and those of well-known companies in a weakened financial condition.

Answer 64

Stock dividends and splits result in adjustments to outstanding options contracts, which are made by the OCC. Contract adjustments for cash dividends are not made. Cash dividends are paid only to persons who own the stock as of the record date. In order to receive the dividend, holders of calls must exercise options prior to the ex-dividend date.

Answer 65

A trustee is responsible for administrative duties of a unit investment trust, which include the custodial, recordkeeping and tax and accounting responsibilities.

Answer 66

Generally speaking, the higher the risk of a bond, the higher its yield spread. A bond issued by a large well-known, and financially strong municipality will typically trade at a relatively low spread in relation to U.S. Treasuries. Spreads widen in weakening economies and narrow when the economy is strong.

Answer 67

The investments with the most exposure to political risk are ADRs and other foreign securities. They can perform poorly if political conditions worsen in their own countries.

Answer 68

Tax-equivalent yield is the yield required by a fully taxable bond to earn the same after-tax yield as a municipal bond. A municipal bond yield is called a tax free yield.

Answer 69

An Index put allows the investor to profit from a downward move in the level of the market as measured by S&P 500 index, while committing less capital compared to the margin requirements needed for the short sale of a number of component issues. A long put holder is not subject to the unlimited upside risk that applies to investors with short stock positions. The maximum loss to the investor is the premium paid.

Answer 70

FINRA Rule 2264 requires firms to provide a margin disclosure statement to each customer prior to or at the time of opening a margin account.

Answer 71

A corporation passes a resolution of the board of directors to set up a brokerage account. The resolution specifies who will have trading authority for the account.

Answer 72

When securities are held in street name, although the customer is the beneficial owner, the securities are held in the name of the broker-dealer. In this scenario, it is the obligation of each firm to make sure that shareholders receive proxy materials on a timely basis.

Answer 73

Closed-end funds may issue 'senior securities', such as preferred stock and bonds, as opposed to open-end funds which may only issue common stock to raise capital.

Answer 74

A bond indenture contains covenants that protect investors.

Answer 75

A client may place unsolicited orders only, if she did not provide required financial information to the firm.

Answer 76

Firms should be most concerned with investor protection as they review requests for outside securities activity.