Wrong Questions Flashcards
1
Q
Exchange Traded Funds
A
trade on exchanges and are priced by supply and demand, like any other exchange-traded product. With pricing influenced by market forces, transaction prices at any given time might be more or less than the fund’s NAV.
2
Q
ODD Disclosures
A
- If a maintenance call is not met it is the BD who determines which securities to sell, not the customer.
- firms can increase their in-house margin requirements without advance notice
- customers can lose more money than initially deposited
- customers are not entitled to an extension of time to meet a margin call
3
Q
Federal funds rate
A
rate commercial money center banks charge each other for an overnight, unsecured loan. It is considered a barometer of the direction of short-term interest rates such as commercial paper and Treasury bills, which often move up or down roughly in parallel with the funds rate.
4
Q
How does the OCC assign exercise notices to short broker-dealers?
A
a random-selection basis only. Broker-dealers, however, may then assign exercise notices to their short customers on a random basis, on a first in, first out (FIFO) basis, or any other method that is fair and reasonable.
5
Q
What are ad valorem taxes?
A
real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states). These are collectively known as local municipalities.
6
Q
Who can approve an options account for trading?
A
Initially, a branch office manager (BOM) can approve an options account. However, all options accounts must ultimately be approved by the firms registered options principal (ROP), and done so promptly.
7
Q
Regulation T
A
- FRB regulation that governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for purchase of securities. Currently sets the loan value of marginable securities at 50% and the payment deadline at tow days beyond regular way settlement.
- Identifies which securities are eligible for purchase on margin and which may be used as collateral for loans for other purchases. Payment in full of securities in a cash account must occur not later than two business days after the standard settlement period.
8
Q
Freeriding
A
- buying and immediately selling securities without making payment—villages SEC’s Reg. T
- if engaged in, account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.
9
Q
Do preferred shares or common shares have higher growth potential?
A
While the growth potential of both common and preferred shares can be tied to a company’s financial well-being, preferred share growth is generally less than that of the common shares. The trade-off is that the preferred shares have preference with dividends received, enjoy a fixed rate of return via those dividends, and have a priority claim over common shareholders in the event of bankruptcy and the dissolution of assets.
10
Q
What is an ADR?
A
a type of equity security designed to simplify foreign investing for Americans. Created when common shares of a foreign issuer are purchased in the foreign company’s home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of foreign-company stock held on deposit.
11
Q
SEC Rule 144
A
Regulates the sale of control and restricted securities, stipulating holding period, quantity limitations, manner of sale, and filing procedures
12
Q
What is a bond coupon?
A
Interest rate the issuer has agreed to pay the investor. Set at the time of issue. Fixed percentage of par. Also called stated yield or nominal yield. Calculated from bond’s par value or face value (generally $1000/bond).
13
Q
What is the current yield of a bond?
A
Measures an one’s annual coupon payment (interest) relative to its market price: annual coupon payment / market price = current yield.
14
Q
What is a bond’s yield to maturity?
A
Annualized return of the bond if held to maturity.
15
Q
What is a bond’s yield to call?
A
Relevant only to bonds that are issued with a call features. May be redeemed before maturity at the issuer’s option. Calculation reflects the early redemption date and consequent acceleration of the discount gain if bond was originally purchased at a discount or accelerated premium loss if bond was originally purchased at a premium.
16
Q
Which securities can be purchased on margin and used as collateral under Regulation T?
A
Exchange-listed stocks, bonds
Nasdaq stocks
OTC issues approved by the FRB
Warrants
17
Q
Which securities cannot be purchased on margin and cannot be used as colleteral for a margin loan?
A
Options (calls and puts)
Rights
Non-national market securities (NMS) OTC issues not approved by the FRB
Insurance contracts
18
Q
Which securities cannot be bough on margin, but can be used as collateral after being held for 30 days under Regulation T?
A
Mutual funds
New issues
19
Q
Which securities are exempt from FRB’s Regulation T margin requirements?
A
US treasury bills, notes, and bonds
Government agency issues
Municipal securities
20
Q
Regulation A?
A
The provision of the SEcurities Act of 1933 that exempts from registration small public offerings valued at no more than $5 million worth of securities issued during a 12-month period.
21
Q
ADRs, DPPs, pegging, Coverdale education savings account
A
22
Q
Which benchmark interest rate indicates the direction of the FRB’s monetary policy?
A
The discount rate, or the rate the Federal REserve Bank charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers
23
Q
What is a prime brokerage account?
A
One in which a customer (institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers.
24
Q
What is the statute of limitations on fraudulent practices under the Securities and Exchange Act of 1934?
A
Five years form the event itself or two years from discovery, whichever comes sooner.
25
What is regular way settlement for corporate securities?
Trade date plus two business days
26
What is the call loan rate?
The rate banks lend to broker-dealers.
27
What is the prime rate?
The rate banks lend to corporate customers.
28
What are income bonds?
Also known as adjustment bonds. Pay interest only if issuer has enough earnings to do so. Often issued by companies coming out of bankruptcy so the interest payments providing the income to meet the objective are uncertain.
29
What are immediate or cancel orders?
an order that instructs the floor broker to execute it immediately, in full o run part. Allow partial execution with the unexecuted portion fo the order being cancelled.
30
What are fill or kill orders?
An order that instructs the floor broker to fill the entire order immediately. If the entire order cannot be executed immediately, it is cancelled. Does not allow partial orders.
31
Limited partnership dissolution
Limited partners paid before general partners
32
What is a breakpoint sale?
Sale of mutual fund shares in an amount just below the level at which the purchaser would qualify for reduced sales charge. Violates conduct rules.
33
What is pegging?
Any action to fix or stabilize the price of a security. Includes both capping (protecting a short call option from being exercised by placing sell orders during the day in the underlying stock) and supporting (multiple purchases of a security to keep it from falling)
34
What is a Coverdell Education Savings Account (ESA)?
An account for education. Maximum annual contribution is $2000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family once during any 12-month period.
35
What is the federal funds rate?
The rate commercial money center banks charge each other for overnight loans of $1million or more. Shortest of loans, makes this a good indicator of the direction short-term ineterest rates are taking.
36
What is required for opening a margin account?
Signed credit and hypothecation agreements. Loan consent form is optional. Risk disclosure document must be provided to customer and attested to as read by signing the credit agreement but RDD need not be signed by customer.
37
FinCEN accomplishes its mission to safeguard financial system by enforcing
The Bank Secrecy Act
38
syndicate desk
a team of individuals responsible for researching, marketing, and pricing larger deals on the sell-side, particularly bonds, loans, or stocks of companies. They are also referred to as a syndicate team and are important for corporations trying to launch a new deal to market. They want to get the right price so attracting the right buyers.
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39
What is a closing purchase?
A transaction in which a writer covers a position by purchasing an option
40
What is regular way settlement on Treasury bonds?
Next business day
41
The writer of a covered call option has how much profit and loss?
Both profit and loss are limited.
42
What is the primary purpose of a syndicate desk in an equity offering?
Build an order book and allocate stock
43
What are exchange traded notes?
Designed to track an underlying asset. Lower expense ratio than actively managed mutual funds, trade on major exchanges like stock. Unsecured debt note issued by an institution. Research credit rating of underwriter because if goes bankrupt, investor risks total default. Taxes are not triggered until fund is sold because does not buy and sell assets within funds.
44
What is an exchange traded fund?
Tracks an underlying asset. Lower expense ratio than actively managed mutual funds. Trade on major exchanges. Fund that holds the assets it tracks—e.g. stocks, bonds, gold, commodities, future contracts.
45
What is a treasury stock?
Issued stock that has been subsequently reacquired by the corporation
46
What is the cost basis of an inherited mutual fund?
The net asset value of the shares when the owner dies.
47
What is regulation S-P?
Consumer privacy law. Firm must include policies to protect the security of non public information in its privacy and opt-out notices.
48
What does the call provision of a bond stipulate?
Call date and call price
49
What is a UTMA account?
Uniform transfers to Minors Act—allows a minor to receive gifts without the aid of a guardian or trustee. Allows appointed custodian to manage minor’s account until minor is of age. Opened under the Tax ID of the minor.
50
What is a variable rate demand note?
Security that provides investors with a state maturity date, floating interest rate, and option to put eh security back to a financial intermediary on a daily or weekly basis.
51
What is a tax-deferred variable annuity?
- insurance contract that promises to pay the buyer a regular income or a lump sum of money at some date in the future. Immediate annuities, by contrast, start paying right away.
- Deferred annuities come in several different types—fixed, indexed, and variable—which determine how their rate of return is computed.
- Withdrawals from a deferred annuity may be subject to surrender charges as well as a 10% tax penalty if the owner is under age 59½
52
What is a direct participation program?
- offers investors access to a business's cash flow and tax benefits
- requires a buy-in from the members in order to access the program's benefits.
- Most are real-estate investment trusts (REITs) and limited partnerships.
Provides exposure to non-correlated assets with steady returns.
53
What is an accredited investor?
Must have net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. Defined in Rule 501 of Regulation D of the SEC
54
What is the Transfer Agent?
In the event of a stock split, required to maintain a record of the shareholders eligible to receive additional shares. Generally banks or trust companies, but sometimes a company acts as his own transfer agent. Three main functions:
1. Issue and cancel certificate to reflect change in ownership
2. Act as an intermediary for the company
3. Handle lost, destroyed, or stolen certificates
55
What is market risk?
Also called systematic risk. Cannot be eliminated through diversification. Possibility of investor experiencing losses due to factors that affect the overall performance of the financial markets.
Greatest risk in a variable life insurance policy (insurance product with separate accounts comprised of various instrument and investment funds such as stocks, bonds, equity funds, money market funds, and bond funds).
56
What is a currency transaction report?
Must be filed when a firm receives cash in excess of $10,000 form one customer in one business day with FinCEN.
57
What risks apply to both foreign and domestic debt instruments?
Political
Repayment
Interest rate
NOT exchange
58
What is a stock dividend?
Distribution of a portion of company’s earnings, paid to a class of its shareholders. made by publicly listed companies. Generally accompanies by a proportional increase or decrease in a company’s stock price.
59
What is a letter of intent on a mutual fund purchase?
Required by a customer and valid for 13 months.
60
What is a money market instrument?
A debt security that matures in one year or less
61
What is a warrant security?
Entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date. Generally has a longer period to expiration than rights, options, or repurchase agreements.
62
Stability in the value of a debt portfolio is greatest when?
Maturity of the debt securities are short.
63
What is a 529 plan?
Education savings. Contributions may be deductible from state taxes, but not federal taxes.
64
What is the difference between a primary distribution and a secondary distribution?
A primary distribution involves a sale of newly issued shares by the issuer. A secondary distribution involves the sale of already issued and outstanding shares.
65
treasury stock, regulation S-P, selling away
**
66
regulation S-P
Requires registered broker-dealers, investment companies, and investment advisers to "adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information."
67
selling away
- refers to offering or obtaining financial products for a client that are not approved by a brokerage.
- Doing so can generate extra commissions for a broker, but comes with a greater degree of risk since those products are not vetted or authorized for sale by the broker's employer
- often seen as a violation of both internal workplace rules as well as broader securities regulation.
68
Credit risk versus systematic risk,U4, U5, U6
***
69
stages of business cycle - how many and what are they
Four: expansion, peak, contraction, trough
70
Which of the following are not considered money market securities?
T-bills
B Commercial Paper
C Reverse Repos
ADR
‘money market’ includes short term debt instruments only, and since ADRs represent ownership (equity) in foreign stocks, ADRs are not debt.
71
The Securities & Exchange Commission (SEC) was created by Congress in
1929
1933
1934
1940
1934
72
When a corporation goes public, it is issuing:
Common stock
Preferred stock
Convertible bonds
Any of the above
Only common stock
73
The term ‘issuer’ most often refers to:
A A corporation seeking to raise additional capital for expansion or modernization purposes
B A business which prints up securities certificates such as bonds and stocks
C A business which has satisfied the listing requirements of one or more approved stock exchanges
D A business, a municipality, or a federal governmental entity which is seeking to raise capital from the sale of security
D A business, a municipality, or a federal governmental entity which is seeking to raise capital from the sale of security.
Whether one considers answers A, B, or C partially accurate, the last answer, D is the most complete therefore best answer.
74
Every publicly-traded corporation is required to have a transfer agent and a registrar. The primary distinction between the two is:
A They are not different --- they perform the same function
The registrar keeps the record of all stock and bond holders
C The transfer agent transmits the payment for securities from the purchaser to the seller in all secondary market trades.
D The transfer agent ensures that dividend payments go out to all registered owners of record on the payable date.
D The transfer agent ensures that dividend payments go out to all registered owners of record on the payable date.
Explanation: This is one of the functions of a Transfer Agent. Registrars make sure that a company does not issue more shares than authorized in the Charter.
75
Boards of Directors in the publicly-traded sphere are elected by corporate stockholders, using which of the following methods?
A statutory voting
B regular voting
C cumulative voting
D any of the above are possible voting procedures
D any of the above are possible voting procedures
| Question 12 Explanation: All three are correct – in fact, Regular and Statutory are the same.
76
Question 15 WRONG
All of the below are typical features of an ETF except:
A they are marginable
B they often are sector-driven portfolios
C they are traded each day based upon 4:00 pm NAV
D none of the above are exceptions
C they are traded each day based upon 4:00 pm NAV
Question 15 Explanation: Exchange traded funds trade on exchanges at market prices determined by supply and demand – the same as regular corporate stocks.
77
Accumulation units are most often associated with:
A life insurance
B annuities
C mutual funds
D ETFs
B annuities
Question 16 Explanation: Variable annuities sell ‘accumulation units’ to purchasers, whose price each day is based upon the 4 pm net asset value of the separate account.
78
One of the most frequently issued money market instruments is commercial paper. Typically, this investment has a maximum maturity:
A of one year
B of 90 days
C of 270 days
D of 180 days
C of 270 days
Question 17 Explanation: The maximum maturity is 9 months or 270 days.
79
When an investor is bearish on the broad stock market
A buying puts on the S&P 500 index is an appropriate strategy
B buying calls on the S&P 500 index is an appropriate strategy
C buying mutual funds is an appropriate strategy
D not investing in the market is an appropriate strategy
A - Buying broad-based Index Put options will provide a hedge against the decline in the broad market.
80
A customer wishes to liquidate 100 shares of ABC common at the market. If the current inside market is 904.78 – 905.57, the client’s transaction will occur disregarding commissions and other charges at
A 904.78
B 905.57
C at the last transaction price prior to entering this order
D at a price agreed to between the firm and the customer
A 904.78
Question 21 Explanation: The best (inside) bid is the price at which a client’s liquidation (sell) order will be executed.
81
A market maker is obligated
A to maintain subject quotes during trading hours
B to maintain and honor firm quotes during trading hours
C to buy no less than one round lot from a customer at its ask price
D to sell no less than one round lot to a customer inside the spread
B to maintain and honor firm quotes during trading hours
Market making firms post firm quotes during the trading day at which they are obligating themselves to do business with other firms as well as retail customers.
82
The spread between bid and offer
A gets wider as the volume increases
B gets narrower as the volume increases
C is entirely up to the firm which is making a market in the stock
D is generally fixed for the trading day
B gets narrower as the volume increases
The more actively traded a stock (high volume), the narrower the spread between the bid and ask prices.
83
The so-called 5% policy pertains to
A mark ups on retail OTC transactions excepting new issues
B commissions on NYSE trades exclusively
C mark ups, mark downs and commissions on retail secondary market trades in municipal bonds
D none of the above
A mark ups on retail OTC transactions excepting new issues
Question 24 Explanation: The FINRA markup markdown and commission policy does not apply to new issues as well as municipal bonds --- MSRB has its own such policy.
84
The principal difference between a selling syndicate and a selling group would be:
A commissions earned
B Eastern versus Western liability
C commitment
D all of the above
C commitment
Question 25 Explanation: Syndicate implies a firm commitment; group implies best efforts.
85
Regulation SHO severely restricts short selling during the cooling offer period of a follow-on offering. Which of the below is true?
A shorting stock of a company undergoing a follow on offering is prohibited during the registration period.
B an investor cannot buy the new shares in a follow on deal if they have sold the outstanding shares of that issuer during the cooling off period.
C an investor may buy the new issue shares on the offering so long as any short sale has been covered at least one business day prior to the effective date.
D none of the above
C an investor may buy the new issue shares on the offering so long as any short sale has been covered at least one business day prior to the effective date.
Question 27 Explanation: SHO are the first 3 letters of the word ‘short.’ Answer C. best describes the basics of this regulation.
86
The maximum coverage offered per separate customer under SIPC insurance was set by Congress at:
A $250,000 for cash and securities combined
B $500,000 for securities and cash combined
C $1,000,000 for securities and cash with no more than $250,000 for cash claims
D $500,000 for cash and securities coverage with no more than $250,000 for securities claims
B $500,000 for securities and cash combined
SIPC was never intended to guarantee customers against investment loss. It’s an insurance program providing ½ million dollars of account insurance in the event a customer’s brokerage firm goes bankrupt, with the maximum CASH coverage the same as bank FDIC coverage: $250K.
87
The hours of operation of the Chicago Board Options Exchange are:
A 9:30 am to 4:00 pm CT
B 8:00 am to 8:00 pm ET
C 8:30 am to 3:00 pm CT
D 7:00 am to 7:00 pm CT
C 8:30 am to 3:00 pm CT
NYSE hours and CBOE hours are the same. 9:30 to 4 ET for the NYSE is the same as 8:30 to 3:00 CT. Make sure you KNOW your time zones!
88
The least liquidity in the securities shown below would be found:
A in securities traded on the Pink Quote system
B in securities listed on regional stock exchanges
C in T-bills
D in general obligation issues
A in securities traded on the Pink Quote system
Question 35 Explanation: Pink sheets: the Pinks: the Pink quotes: All these terms in your textbook speak of thinly traded, closely-held, low daily volume stocks, where liquidity is not especially present when compared to NYSE and NASDAQ stocks.
89
Sweeteners as that term is used in the investment banking community refers to issue enhancements which include:
A warrants
B insurance
C convertibility
D any of the above
D any of the above
Each of these when associated with a bond issue makes the bond more attractive from a client’s point of view.
90
Which of the following investment instruments trades on an exchange at a market price not directly related to its net asset value?
A open end investment company
B private hedge fund
C put and call option contracts
D closed-end investment company
D closed-end investment company
Only the closed-end investment company trades at supply & demand pricing on an Exchange, and has no specific relationship to the fund’s underlying asset value.
91
When a corporation announces that it is seeking additional equity capital through a sale of additional authorized but unissued shares,
A this is a secondary distribution
B this is a primary distribution
C this is an IPO
D this is a split offering
B this is a primary distribution
The ‘trick’ with this question is that anytime a company is selling NEW previously unissued shares from their Authorized shares maximum, those shares are NEW ---- Primary distribution means the shares being sold are NEW, never before issued, not previously owned by anyone.
92
Among the differences between an introducing broker-dealer and a clearing carrying broker-dealer is that clearing firms:
A Maintain possession and control of securities and introducing firms do not.
B Are members of all major securities exchanges and introducing firms are not.
C Are permitted to engage in investment banking and underwriting of new issues of securities and introducing firms are not.
D All of these are differences.
A Maintain possession and control of securities and introducing firms do not.
The terms ‘clearing’ and ‘carrying’ have to do with a brokerage firm’s performance of certain functions most other firms are not permitted to do, such as have physical possession and custody of customers’ cash and securities.
93
Keynesian economic theory deals with:
A Controlling the economy through regulating money supply.
B Controlling the economy through budget/government spending and taxation policies
C Incentivizing responsible financial behaviors through Congressional legislation and agency regulations
D None of the above
B
Though a very simplistic way of describing Keynesian theory, it focuses on government taxation and spending policies, which are fiscal in nature. Answer A would be more appropriate if we were asking about monetary policies, which would be the work of the Federal Reserve.
94
A significant number of public investors do not have a solid understanding of how common stock is offered to the public. Two methods are the secondary offering and the follow-on offering. Which of the below are true statements regarding these methods?
A Secondary offerings involve the sale of new shares other than the first time a company is going public (IPO).
B A follow-on is an offering of new shares other than the initial public offering (IPO).
C Secondary and Follow-on are two different terms for the same investment banking activity.
D Secondary offerings involve the resale of outstanding shares at market bid and ask pricing.
B A follow-on is an offering of new shares other than the initial public offering (IPO).
The term Secondary Offering is used to describe a situation in which already-issued shares are being resold into the marketplace, usually by insiders, officers, and directors of a company. The shares being sold are NOT new shares coming from the company. A follow-on offering, also called an APO (additional public offering) is where a company is issuing and selling more new shares to the public.
95
Mitigation of the risk of loss in a bearish market can be achieved by customers with vulnerable long stock positions placing:
A Sell limit orders
B Buy stop orders
C Sell stop orders
D GTC orders
C Sell stop orders
A client who owns stock is exposed to 100% loss of invested principal, unless the client engages in one of a number of strategies designed to mitigate/reduce the risk of loss. One such strategy is the sell stop order, in which the client picks a price at which he or she will exit/liquidate their stock position if the stock falls to that price level, ‘stopping’ the loss from getting any worse.
96
In the industry, the term ‘Blue Chip’ most often is associated with:
A stocks that outperform the CPI
B stocks that outperform GDP
C stocks that consistently produce income and modest growth over long periods of time
D none of the above
C stocks that consistently produce income and modest growth over long periods of time
Question 2 Explanation: When the term blue chip stocks is used, think of the long-establish most well-known companies that consistently perform well and have done so for a very long time. Most if not all of these are listed on the NYSE.
97
When a customer places a purchase order for an NYSE stock and the trade is reported at a price which is different than the actual transaction price,
A the client is given the better price
B the client pays the price at which the trade was executed
C the client pays the price initially reported
D the trade goes through at a price approved by FINRA
B the client pays the price at which the trade was executed
Occasionally, a client will be told that a trade was done at a transaction price which turns out to be incorrect. This can happen for a number of reasons, usually clerical, not intentional. Federal law and FINRA rules state clearly that the client will be told about the erroneous report, and the transaction will be done at the actual price at which it took place, not at the erroneous price. Since every transaction is a legal contract, the actual price at which the trade was executed is the legally binding price.
98
ETPs (exchange-traded products) generally include:
A ETFs
B ETNs
C ELNs
D any of the above fit this category
D any of the above fit this category
Exchange traded funds; Exchange traded Notes; Equity Linked Notes are all traded on the NYSE.
99
Under what conditions, if any, may an agent of a broker-dealer share in the profits and losses of a customer’s account?
A under no circumstances
B only with permission from an SRO such as FINRA
C only if the sharing is in direct proportion to the financial contribution made by the agent to the account
D only if it is a discretionary account
C only if the sharing is in direct proportion to the financial contribution made by the agent to the account
A customer can open a joint account with their registered rep. In that event, sharing in the performance of the account is permitted, in proportion to the contribution made by each party.
100
The agency in charge of maintaining a list of individuals and institutions for which opening a brokerage account may be prohibited or restricted is known as:
A OFAC
B Treasury
C CTR
D SAR
The Office of Financial Asset Control (OFAC) maintains the list.
101
In order for a registered representative to maintain their securities license on an ongoing basis, which of the following properly states the CE requirements?
A passing a regulatory element CE exam within 3 years of their anniversary date.
B passing a regulatory element CE exam within 2 years of their anniversary date.
C passing a firm element CE exam every 3 years after their anniversary date.
D passing a firm element CE exam within 1 year of their anniversary date.
B passing a regulatory element CE exam within 2 years of their anniversary date.
Once a person passes their RR exam, within 2 years from that anniversary date, a FINRA required continuing education test must be taken and passed. Then the CE tests are every three years thereafter.
102
When an agent engages in securities activities outside the scope of their broker-dealer,
A the agent must disclose this activity to their principal within 24 hours.
B the agent is in violation of FINRA rules prohibiting selling away.
C the agent must update their Form U-4 within 30 days.
D the agent must show they understand the suitability requirements of the securities being sold.
B the agent is in violation of FINRA rules prohibiting selling away.
Question 9 Explanation: Selling away is a violation. It means selling securities which are not authorized to be sold by the employing broker-dealer.
103
United States government budgetary and taxation policies are best described as:
A monetary policy
B Keynesian policies
C legislative policies
D fiscal policy
D fiscal policy
Government budget, spending and taxation policies are fiscal policies. Federal Reserve policies are monetary
104
All states have a securities Administrator whose job it is to enforce the securities laws of their state. All Administrators are part of an organization known as:
A the SEC
B NASAA
C FINRA
D the SROs
All State securities Administrators are part of the North American Securities Administrators Association (NASAA).
105
It is not unusual for a broker-dealer to fill a customer order for an NYSE stock as principal out of inventory in lieu of wiring it to the floor the exchange.
A this is a 4th market transaction
B this is a 3rd market transaction
C this is a second market transaction
D this is a 1st market transaction
B this is a 3rd market transaction
Trades in the 3rd market are trades in stocks which are executed off the floor of the stock exchange on which those stocks are listed.
106
In the business of underwriting, when a firm adopts a firm commitment, it is acting as a:
A broker
B dealer
C wholesaler
D distributor
B dealer
Question 22 Explanation: Firm commitment implies the syndicate is purchasing the new issue from the issuer with a view to retailing it to the investing public….this is acting in a principal/dealer capacity. Best efforts underwritings are being done on an agency/brokerage basis.
107
When the US dollar weakens,
A exports to foreign countries tend to increase
B imports from foreign countries tend to increase
C US trade deficit will tend to rise
D the FRB will engage in QE policy
B imports from foreign countries tend to increase
Question 24 Explanation: A ‘weak’ US dollar makes US goods ‘cheaper’ for foreign buyers to buy, since their currency becomes ‘stronger.’ This leads to an increase in the export of US manufactured goods.
108
Among the most significant differences between an open-end investment management company and a unit investment trust is that:
A the open end company has a net asset value and a UIT does not.
B the open end company issues redeemable securities and the UIT does not.
C the UIT has a fixed portfolio and the open end company does not.
D they require different FINRA licenses for an agent to sell them.
C the UIT has a fixed portfolio and the open end company does not.
A unit investment trust typically has a fixed portfolio of securities, whereas an open end (mutual fund) makes purchases of additional securities for the portfolio on a regular and frequent basis.
109
Single stock, or single sector, risk is more generally in the category described as:
A systematic risk
B market risk
C non-systematic risk
D economic risk
C non-systematic risk
Non-systematic risk is business risk --- the risk of putting all your eggs in one basket, in one company, in one business sector…..and if that business does badly, you lose. Diversification is a good way of mitigating this risk.
110
Many folks living across the country choose to participate in their state’s 529 college savings plan. These investment programs are generally referred to by FINRA as:
A municipal fund securities
B LGIPs
C pre-paid tuition plans
D UGMA or UTMA
A municipal fund securities
The 529 plans are considered by the SEC and FINRA to be municipal fund securities.
111
As interest rates rise, which of the below will change the least in price?
A T-bills
B T-notes
C T-bonds
D their prices react roughly the same amount
A T-bills
Question 30 Explanation: Short term debt reacts the least in price when rates change
112
Your client wishes to make a substantial investment in a mutual fund your firm is offering. In order to qualify for a reduced sales load, they sign a letter of intent which gives them:
A a year to comply with the breakpoint level
B 13 months to comply with the breakpoint level
C 90 days to comply with the breakpoint level
D an obligation to comply with the rules regarding breakpoint qualification
B 13 months to comply with the breakpoint level
A letter of intent is not an obligation but rather a show on one’s intent to invest an amount equal or more than a mutual fund’s breakpoint level so as to qualify for the reduced sales charge. LOI gives 13 months to do so.
113
# Choose from among the below ratings the one which is the higher credit rating in the speculative category as defined by Standard & Poors rating service would be:
A AAA
B BB+
C Ba1
D CCC
B BB+
Question 32 Explanation: Investment grade ratings end with the BBB rating. Below that are speculative grade ratings. BB+ would be the higher speculative rating from among these multiple choice answers. Ba1 is a Moody’s rating, not S&P.
114
Absent exceptional circumstances, NASDAQ trades during business hours are reported within:
A 15 minutes of the trade
B 1 minute of the trade
C 30 seconds of the trade
D 10 seconds of the trade
D 10 seconds of the trade
Question 35 Explanation: Trades are to be reported to the appropriate ‘tape’ within 10 seconds of execution of the transaction.
115
When the term ‘shelf registration’ is used, it typically refers to:
A Registering securities with the SEC in anticipation of a future offering.
B Registering securities with the SEC and selling part of the registered securities immediately and reserving the remaining securities for sale at a later time.
C Filing a notice with the SEC of the Issuer’s intent to file a registration statement in the next 90 days.
D An offering which began but due to lackluster public interest, was put ‘on the shelf’ for a period not to exceed 30 days to see if investor interest picked up.
Question 38 Explanation: This is the industry’s definition of a ‘shelf’ offering – register more shares now than you intend to sell now, and save the balance for a later time, putting them ‘on the shelf.’
B Registering securities with the SEC and selling part of the registered securities immediately and reserving the remaining securities for sale at a later time.
This is the industry’s definition of a ‘shelf’ offering – register more shares now than you intend to sell now, and save the balance for a later time, putting them ‘on the shelf.’
116
When institutional investment managers open brokerage accounts at several clearing broker-dealers, those clearing broker-dealers process the transactions and have the back-office clearing and processing handled through a single broker-dealer. This firm is identified in the SEC and FINRA regulations as a:
A Floor Broker
B Registered Trader
C Prime broker
D Omnibus firm
C Prime broker
Think of a funnel. Big institutional investors are doing many trades every day through numerous broker-dealers with which they have accounts. But all the transactions and the cash and securities clearing and settlement are ‘funneled’ through one firm for accounting simplicity. The prime broker is the bottom part of the funnel.
117
```
When a Board declares a cash dividend, the order of dates beginning with that announcement date is:
I. Declaration date
II. Payment date
III. Record date
IV. Ex-dividend date
```
A I, III, IV, II
B II, III, IV, I
C I, II, IV, III
D I, IV, III, II
D I, IV, III, II
Remember the acronym D E R P --- this is the chronological order of the relevant dates when a cash dividend is declared: declaration date; ex-dividend date; record date; payable date
118
NASDAQ market makers wishing to increase the ADTV (average daily trading volume) they handle in those stocks:
A May publish positive research reports about those issuers
B May instruct their registered reps to recommend those issues to their customers in greater amounts.
C May pay other brokerage firms to direct trades in those issues to the market maker for execution.
D None of the above are permitted activities
C May pay other brokerage firms to direct trades in those issues to the market maker for execution.
Question 43 Explanation: This practice is known as ‘payment for order flow’ and is perfectly legal as long as the firm makes full disclosure to public customers that such an agreement exists.
119
A client of yours purchased 1000 shares of RAL common stock on Monday, February 11th in a cash account at a CMV of $115 per share. The next day the stock moves to $128 on a very favorable news report and the client places an order to sell the 1000 shares at the market. On the Reg. T payment date the client has not paid for the purchase and asks that liquidation proceeds be used to cover the cost of the purchase.
A This is free-riding, a violation of Reg. T
B This is a variation of front-running, a fraudulent act.
C This is referred to as trading ahead.
D Your firm will begin an investigation into the probability that this client had access to inside information prior to the announcement of the favorable news.
A This is free-riding, a violation of Reg. T
Question 44 Explanation: The purchase needs to be paid for in a timely way or the law does not consider the purchaser to be the ‘owner’ of the shares and entitled to any profit on them. Regulation T refers to the use of sale proceeds to pay for the purchase as ‘free-riding.’ It is not acceptable.
120
Allowable ways to qualify for a breakpoint when purchasing front-end load mutual funds include:
I. Exchange or conversion privilege with a fund family
II. Reinvesting dividends and/or capital gains distributions under an LOI.
III. 13 month LOI
IV. ROA – rights of accumulation
A All of the above
B II, III, and IV
C III and IV
D III only
C III and IV
III and IV are two of the ways to obtain a reduced sales charge (breakpoint). Switching from one fund to another under the same sponsorship (exchange privilege) carries no sales charge at all, so a reduction is irrelevant. Reinvesting distributions is a wonderful practice, and will help reach a breakpoint, but ONLY under the ROA (rights of accumulation) program, not the 13 months LOI approach.
121
Each of the below business enterprises exhibit flow-through of tax and related consequences except:
A DPP
B LLC
C Sub S
D C corp
D C corp
The regular corporation, known as the C corp., has its profits taxed under the Internal Revenue Code. The other three business types in this question are not subject to IRS taxation of their profits.
122
Depreciation write-offs represent which of the following?
A An estimate of the loss in value of a tangible asset over time.
B An IRS mandated percentage allowable annual non-cash charge against revenues
C A subtraction from the computation of corporate cash flow.
D A tax deduction for the loss in value due to extraction or removal.
B An IRS mandated percentage allowable annual non-cash charge against revenues
Businesses can take advantage of annual tax-deductible write-offs according to specific schedules in the internal revenue code, referred to as depreciation schedules.
123
1. Which of the following market participants have a fiduciary responsibility to their customers?
a. Municipal Advisors
b. Broker Dealers
c. Traders
d. Market Makers
A.
124
2. Which of the following takes money out of the money supply?
a. Fed’s purchase of securities
b. Moral suasion
c. Increasing the reserve requirements
d. Decreasing the discount rate
C.
125
3. Which type of securities offering allows existing shareholders to purchase additional shares in the company, typically in proportion to their current holdings?
a. Private placement
b. Initial public offering
c. Secondary offering
d. Stock rights offering
D.
126
5. Which of the following is considered zero-coupon securities?
a. Municipal bonds
b. Treasury bills
c. Treasury bonds
d. Preferred stock
B.
127
6. Which of the following is considered a Government Sponsored Enterprise?
a. Ginnie Mae (GNMA)
b. Tennessee Valley Authority (TVA)
c. Federal National Mortgage Association (Fannie Mae)
d. Sallie Mae (SLMA)
C.
128
9. To avoid penalties, assets held inside a Coverdell ESA must be used by the beneficiary’s:
a. 18th birthday
b. 25th birthday
c. 29th birthday
d. 30th birthday
D.
129
10. A hybrid REIT combines which of the following two types of REITs?
a. Retail and Apartment
b. Mortgage and Healthcare
c. Commercial and Healthcare
d. Retail and Healthcare
B.
130
12. ABC equity security recently traded as follows:
100 shares @ $50.00
100 shares @ $50.04
200 shares @ $50.10
The current NBBO is $50.09 – $50.12. What is the bid-ask spread?
a. $.03
b. $.04
c. $.06
d. $.12
A.
131
15. Under Reg T, the amount of margin that must be in the account when the account is first established is:
a. 25%
b. 40%
c. 50%
d. 75%
C.
132
17. Which of the following is required on a customer confirmation?
a. Amount of taxable gain or loss
b. Trade capacity
c. Capital gain
d. Dividend date
B.
133
18. When is a market maker permitted to receive compensation from an issuer?
a. Under no circumstances.
b. If the compensation is less than $1,000 per year.
c. If the compensation is connected to an investment banking transaction.
d. If the compensation is related to an issuer that is listed on a U.S. Exchange.
C.
134
A particular issuer of bonds chooses to engage a managing underwriter under a negotiated, firm-commitment underwriting contract. The underwriter chooses to sell the bonds using a selling group rather than a syndicate. Who bears the financial risk of unsold bonds?
A. The issuer
B. The institutional investors
C. Selling group members
D. The managing underwriter
D. The managing underwriter
Instead of forming a syndicate, an underwriter may choose to form a selling group. A selling group member has no obligation to buy the bonds. The financial risk of unsold bonds is borne entirely by the managing underwriter when a selling group is used in lieu of a syndicate.
135
Registered persons must complete the regulatory element of their continuing education within ____ of their second anniversary and every ____ years thereafter.
A. 120 days; 3 years
B.90 days; 2 years
C.90 days; 3 years
D.60 days; 2 years
A. The regulatory element of continuing education requires that all registered persons complete a computer-based training session within 120 days of the person’s second registration anniversary and every three years thereafter. The content of the regulatory element is determined and provided by FINRA and is appropriate to the class of registered representative or principal. If a person does not complete the regulatory element during the prescribed period, the person’s license will become inactive, and they will not be able to perform any of the activities that require registration, and they will not be compensated for any of those activities.
136
Front-running refers to the practice of:
A. Inter-positioning
B.Trading ahead of a customer’s block order
C.Trading ahead of marketable customer orders
D.Trading ahead of research reports
B. Front-running is the practice of trading for one’s own account in front of a large customer trade (for example a block trade of 10,000 or more shares), because you believe the order will impact the market price of the security. It is a form of insider trading.
