Chapter 1 - Custom Exam v.1

What's an investment adviser?

A person in the business of giving investment advice for a fee - Investment advisers are individuals or companies that provide investment advice about securities for a fee. Broker-dealers buy and sell securities for commissions. Custodians hold funds or securities for investors. Transfer agents manage and keep track of the shareholders of a corporation that issues stock.

A customer has an account with a discount broker-dealer that specializes in online trading. If the customer is being charged a commission, the firm is MOST likely acting in which of the following capacities?

Agent - A broker-dealer who charges customers a commission is acting as an agent or broker. A broker-dealer who charges customers a markup or markdown is acting as a principal or dealer.

The investment banking department of a broker-dealer does NOT typically perform which of the following activities?

Buying and selling securities for both customers and the firm's own account - All of the activities can be performed by the investment banking department, except for buying and selling securities for customers and/or the firm's own account. Instead, this is a function of the trading department.

If ABC Brokerage (a broker-dealer) purchases 600 shares of stock from a customer and places the securities into its inventory, it likely acted as a(n):

Dealer - When a broker-dealer buys a security from a customer using its own funds and places the securities into its inventory, it is acting as a dealer (principal). Since the firm is buying the securities from the customer, the customer is charged a markdown on the transaction (the firm charges a markup if it is selling the securities to the customer). On the other hand, if the firm locates the other side of the trade for its customer, it is acting as a broker (agent) and will charge the customer a commission. A firm is acting as an underwriter when it buys securities from an issuer and sells them to customers (i.e., it engages in primary market transactions). A firm that controls trading in a given stock on an exchange is referred to as a designated market maker (DMM).

An investor who is searching for a quote on a non-listed stock may find it on:

OTCBB - Non-listed stocks, also referred to as OTC equities, are quoted electronically on the Over-the-Counter Bulletin Board (OTCBB) and the OTC Pink Marketplace.

A broker-dealer executes but does not process transactions. If the firm processing the transactions does not know the identity of the customers, this is known as a(n):

Omnibus account - Due to the expense of setting up trade processing operations, many smaller broker-dealers choose not to self-clear. These firms do not process customer transactions nor operate their own Operations Department. Instead, they contract with another member firm to perform these services. The firm providing these services is the clearing firm, while the firm paying for these services is the introducing firm. While customers of an introducing firm consider that firm as their broker-dealer, their funds and securities are physically held at the clearing firm, from which they generally also receive statements and confirmations. If the introducing firm keeps the books and records for its own customers and the clearing firm does not know the identity of these customers, this arrangement is known as an omnibus account.

The goal of which of the following entities is to increase the volume of securities transactions by eliminating physical delivery with a book entry system?

The Depository Trust & Clearing Corporation's (DTCC's) goal is to expand the ability to process transactions by automating clearing and settlement. This involves replacing physical delivery of securities with book-entry (electronic delivery).

The Pink Marketplace displays

The market makers for stocks that are not listed on either the NYSE or Nasdaq - The Pink Marketplace lists market makers and their bid and asked quotations for over-the-counter stocks (i.e., OTC equities). These OTC equities are not listed on either the NYSE or Nasdaq.

A broker-dealer acting in an agency capacity will charge customers a

commission - When acting in an agency capacity, the broker-dealer will normally charge the customer a commission. A broker-dealer that is always willing to buy and/or sell a security is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and charge a markup when selling stock to a customer.

A broker-dealer is clearing its trades through another broker-dealer but is not disclosing specific information regarding its clients. Who is responsible for maintaining the account records?

the introducing broker-dealer - When a firm clears trades for another firm but is not given specific information regarding the introducing firm's clients, the account is said to be an omnibus account. Introducing firms are required to establish and maintain records for omnibus accounts.