explanation SIE EXAM 2

d

#1. When a brokerage firm is acting as a dealer, it is acting in the capacity of a/an a) Agent. b) Fiduciary. c) Broker. d) Principal. As a dealer, a firm is acting as a principal when buying and selling securities for its own account.

b

#10. When can a statutory prospectus be presented to an existing client of the brokerage firm? a) After the underwriter submits registration documentation to the SEC and the cooling-off period begins b) After the cooling-off period and after the issue is designated as within compliance c) Never; they are exempt from the requirement to review the statutory prospectus. d) As soon as the syndicate wins the bid for the sale and marketing of the new issue The statutory prospectus is another name for the final prospectus and is created after the cooling-off period and after the issue is determined to be in compliance. That is when the offering becomes effective and the security is available for sale to the public. (Issue date and issue price are added to the preliminary prospectus to make up the statutory prospectus.)

b

#11. Which of the following statements is INCORRECT with regard to broker/dealers? a) A principal is a dealer and sells securities from its own inventory. b) A dealer makes a profit by charging a commission on the security transaction. c) An agent is a broker and trades securities for a customer. As an agent, a firm does not own the security. d) Securities firms may act in the capacity of either a principal or an agent and are referred to as broker/dealers. Dealers do not profit by charging a commission; they make their profit by charging markups on sales and markdowns on purchases.

d

#14. An investment company can perform certain activities only with the approval of a majority of the shareholders. Which of the following is the board of directors allowed to do WITHOUT a shareholder vote? a) Change the fund's investment objectives b) Approve investment advisory agreements c) Change the fees d) Appoint officers of the investment company The board is elected by the shareholders, but the board has the authority to appoint officers to perform the company's activities.

b

#14. An investor invests $20,000 in a limited partnership. The investor's share of recourse debt is $80,000. Which of the following is TRUE regarding this investment? a) The maximum risk is $20,000. b) The maximum risk is $100,000. c) The basis is $20,000. d) The basis is $80,000. Since the loan is recourse (at risk) debt, basis and risk are the same: $100,000.

a

#16. The cyclical and constantly fluctuating nature of interest rates has the most direct impact on a) Market values of fixed income securities. b) Corporate stock prices. c) No one type of security more than another since all markets are equally affected. d) The value of growth mutual funds. Interest rates fluctuate constantly and directly affect the market value of fixed income securities. The threat of suffering a loss due to a change in the interest rate is called interest rate risk. All fixed income securities are subject to interest rate risk.

c

#17. What is an underwriter's maximum sales charge on a limited partnership (LP)? a) 8% b) 8½% c) 10½% d) 12% The maximum permissible sales charge on limited partnership (LP) interests is 10% plus ½% for due diligence expenses.

d

#18. What is the consequence of contributing more than the specified maximum to a Roth IRA? a) The contribution limit will be raised. b) Distributions will be taxed as ordinary income. c) The account growth will not be tax-deferred. d) The investor will pay a tax penalty. There is a specified maximum contribution that can be made to Roth IRAs, as with traditional IRAs. If a taxpayer contributes more than the maximum amount, a 6% tax penalty will be imposed.

a

#19. What type of annuity contract could act as a hedge against either inflation or deflation? a) Combination annuity b) Annuity with a period certain c) Fixed annuity d) Variable annuity A combination annuity is a good hedge against inflation and deflation because a portion of the contract pays fixed interest, while the remaining portion could be placed in a variable annuity, which offers inflation protection.

d

#20. All of the following are grounds for statutory disqualification EXCEPT a) Any felony in the last 10 years. b) Lying on the Form U4. c) Being barred by another SRO. d) Any misdemeanor in the last 5 years. Only securities-related or theft-related misdemeanors are grounds for statutory disqualification. All the other activities are grounds for statutory disqualification from membership or association.

c

#21. A municipal dealer has bonds "out firm" to another dealer. Which of the following statements applies to this situation? a) This is a type of AON. b) The price can be re-negotiated. c) The dealer is locked into a quote. d) The time period is not specified. An "out firm" quote is a bid price guaranteed to a dealer by another dealer for a specified period of time.

c

#24. If the Federal Reserve Board through the FOMC (Federal Open Market Committee) lowers the discount rate, which of the following will decline? a) Lending levels at banks b) Inflation rate c) T-Bill rate d) Prime rate The T-Bill and the fed funds rates will decline. The prime rate may not, and lending levels increase when rates are lower.

d

#25. The cyclical and constantly fluctuating nature of interest rates has the most direct impact on a) Corporate stock prices. b) No one type of security more than another since all markets are equally affected. c) The value of growth mutual funds. d) Market values of fixed income securities. Interest rates fluctuate constantly and directly affect the market value of fixed income securities. The threat of suffering a loss due to a change in the interest rate is called interest rate risk. All fixed income securities are subject to interest rate risk.

c

#25. The shareholders of a mutual fund have certain rights associated with the ownership interests they hold in the company. These rights include all of the following EXCEPT a) Voting rights/proxy rights regarding company issues. b) Election of board. c) Approval authority for the company's annual report. d) Approval of investment advisory agreement. This is an EXCEPT question. Mutual fund shareholders have the right to receive annual/semiannual reports; however, the company itself has approval authority for its publication. The shareholders approve the investment advisory agreement, have voting rights regarding company issues and elect board members. Additionally, they approve changes in investment objectives, policies, and fees, and ratify the selection of independent auditors.

b

#26. With regard to sales breakpoints, any schedule changes must be communicated to existing shareholders within what period of time? a) Within 30 days b) Within 1 year c) Immediately d) Within 7 days Investment companies have 1 year to advise existing shareholders of changes to breakpoint schedules.

d

#27. If an investor is considering working with a registered representative, which resource is available to review the person's professional background? a) SEC b) NASAA c) EDGAR d) BrokerCheck FINRA's BrokerCheck database is a resource for investors to check the credentials of people and firms in the securities industry.

d

#27. Which of the following CANNOT benefit from the catch-up contributions provision in IRAs? a) An IRA owner age 50 b) A 401(k) participant who is 57 years old c) A married person with a nonworking spouse who is 53 years of age d) A 45-year-old man currently on disability Taxpayers who are age 50 or older will be entitled to make additional "catch-up" contributions to their IRA or spousal IRA accounts. A 401(k) plan also permits participants who are age 50 or older at the end of the calendar year to make catch-up contributions.

d

#28. The cyclical and constantly fluctuating nature of interest rates has the most direct impact on a) Corporate stock prices. b) No one type of security more than another since all markets are equally affected. c) The value of growth mutual funds. d) Market values of fixed income securities. Interest rates fluctuate constantly and directly affect the market value of fixed income securities. The threat of suffering a loss due to a change in the interest rate is called interest rate risk. All fixed income securities are subject to interest rate risk.

d

#29. Which of the following is true regarding a private securities transaction? a) It is a transaction within the normal business activities of the member firm. b) Associated persons are allowed to participate in private securities transactions at any time. c) It is also known as "controlled business." d) It is a violation of Conduct Rules. Private securities transactions are defined as transactions that take place outside the normal business activities of the member firm and are not recorded on the firm's books and records. This is known as "Selling Away," and is a violation of FINRA Conduct Rules. However, transactions among immediate family members are allowed if the associated member does not receive any compensation. In addition, personal transactions in investment company and variable annuity securities are permitted.

a

#3. A 35-year-old employee and first-time home buyer wishes to withdraw $10,000 from her IRA account for the purchase. This provision is available without penalty in a) Traditional and Roth IRAs. b) No IRA: buying a home is not a qualifying event. c) Traditional IRAs only. d) Roth IRAs only. This hardship provision is available to owners of both traditional and Roth IRA accounts, without penalty.

c

#31. A customer who purchases securities in a cash or margin account must pay for the securities in a) 1 business day. b) 3 business days. c) 4 business days. d) 7 business days. A security purchased on margin must be settled in 4 business days. This differs from the 2 business days' settlement date for securities settling regular-way.

a

#32. A Treasury bond with a 10 1/4% coupon due on July 1, has interest payment dates of Jan. 1 and July 1. It is traded for settlement on Feb. 24. What is the number of days of accrued interest? a) 54 b) 55 c) 56 d) 57 Governments notes and bonds use "actual over actual" (days in month over days in the year) and settle next day. 31 days in January plus 23 in February = 54 days. The settlement date does not count.

d

#32. A guaranteed bond is one that is guaranteed by another company or entity. We would typically see a guaranteed bond used in which of the following situations? a) Registered secondary offering b) Competitive bid underwriting c) Merger d) Spinoff A spinoff occurs when a division of the company is separated into a new entity. Often this new entity will issue bonds that are guaranteed by the company it was formerly associated with to reduce interest costs. The spinoff entity is sometimes held as a subsidiary. In other instances, it is sold to another company.

c

#33. An investor purchasing a mutual fund will pay what price? a) The public offering price quoted at previous day's close b) The next calculated net asset value after purchase c) The next calculated public offering price after purchase d) The net asset value quoted at previous day's close An investor will pay the next calculated public offering price, which is the net asset value plus any sales charges, after the time of purchase. Remember that mutual fund investors buy at the public offering price (POP) and redeem at net asset value (NAV) based on the next price to be computed at the close of the trading day. This is called forward pricing.

c

#34. Where does the trading of listed stocks in the OTC market take place? a) Composite b) Fourth Market c) Third Market d) Instinet A listed stock trade in the OTC market is a Third Market trade. These trades are reported to FINRA, and quotes can be found on the Consolidated Quote System (CQS).

c

#35. An investor invests $20,000 in a limited partnership. The investor's share of recourse debt is $80,000. Which of the following is TRUE regarding this investment? a) The basis is $80,000. b) The maximum risk is $20,000. c) The maximum risk is $100,000. d) The basis is $20,000. Since the loan is recourse (at risk) debt, basis and risk are the same: $100,000.

b

#36. The separate account for a variable life policy had a 3% rate of return over the past year. The AIR for the policy is 6%. How will this affect the death benefit of the policy? a) The rate of return for the separate account does not affect the death benefit, only the cash value. b) The death benefit will decrease but not below the face amount of the policy. c) The death benefit will decrease. d) The death benefit will increase since the rate of return was positive. The death benefit decreases if the rate of return falls below the AIR, but cannot fall below the minimum, which is the face amount of the policy.

c

#37. Which of the following factors will most likely create reinvestment risk? a) Decreasing asset values b) Opportunity cost c) Falling interest rates d) Short-term investments Reinvestment risk is the risk that, upon maturity, if interest rates have fallen, the income produced by the currently available bond yields may be much less.

d

#37. Which of the following is a debt security that matures in 1 year or less? a) Treasury notes b) GNMA bonds c) Variable Rate Demand Notes (VRDNs) d) Money market instruments Money market instruments are high-quality, short-term (1-year maximum maturity) debt. Treasury notes are issued with maturities of 2 years, 3 years, 5 years and 10 years. Government National Mortgage Association bonds (GNMAs) are long-term instruments that are collateralized by mortgages. VRDNs (Variable Rate Demand Notes) are long-term (20-30 years) variable rate securities issued by municipalities.

b

#38. Why might the expense ratio of a no-load mutual fund be lower than that of a mutual fund with a load? a) Sales charges of mutual funds with loads are included in their expense ratios. b) No-load funds may not charge a 12b-1 fee that is greater than 25 basis points. c) The cost of managing a mutual fund with a load is higher than that of a no-load fund. d) No-load funds are not permitted to charge 12b-1 fees. Mutual funds with loads may charge a higher 12b-1 fee, whereas the 12b-1 fee for a no-load fund cannot be greater than 25 basis points. Otherwise, they lose their "no-load" status. Remember that a 12b-1 fee is a distribution fee that mutual funds charge to cover the cost of marketing and distributing fund shares. It is included in the expenses of the fund, thereby impacting the expense ratio. Do not be confused by the sales charges associated with load funds. They are not included in the expense ratio calculation but, rather, are added to the NAV to determine the sales price. Remember, NAV + SC = POP.

c

#38. Your client owns stock in a company that has announced a stock rights offering. If the client does not subscribe to the offer, his percentage of ownership interest in the company will a) Be worth more. b) Increase. c) Decrease. d) Remain the same. If a client does not subscribe to the shares entitled by his preemptive rights during a stock rights issue, his proportionate ownership will decrease because there will be an increase in outstanding shares owned by others after the offer.

d

#40. A mutual fund that charges the maximum sales charge of 8½% allowable by the Investment Company Act of 1940 does NOT have to offer a) Dividend reinvestment at NAV. b) Breakpoints. c) Rights of accumulation. d) Exchange rights. Exchange rights are a convenience privilege and are not required by the Act. All of the other rights must be made available to investors in order to collect the maximum sales charges.

a

#41. The equation for outstanding stock is a) Issued shares minus treasury stock. b) Authorized shares minus treasury stock. c) Issued shares minus unissued shares. d) Authorized shares minus unissued shares. Outstanding Stock = Issued Shares - Treasury Stock. Remember that treasury stock, which is stock that has been issued (sold to the public) and subsequently bought back by the corporation, must be subtracted from the shares that have been issued.

c

#43. FINRA's main functions include all of the following EXCEPT a) Monitoring compliance with rules of ethical practice. b) Writing rules enforcing broker/dealer behavior. c) Approving SEC rules and violations. d) Governing broker/dealer and registered representative trading activity. FINRA regulates only the over-the-counter and national exchanges, monitoring compliance with ethical practices and writing rules enforcing broker/dealer behavior. The SEC monitors FINRA, not the other way around.

b

#44. After what age could a Roth IRA distribution be classified as qualified? a) 50 b) 59½ c) 70 d) 72 Roth IRA distributions made after the age of 59½ are considered qualified distributions. Other distributions can be labeled as qualified before the age of 59½ if they are made to the beneficiary at the owner's death, if the owner is disabled, or if the distribution is for the first-time purchase of a home or for higher education. Qualified distributions are desirable because there is no 10% penalty imposed for early withdrawals.

d

#45. An investment adviser receives a fee for services. This fee is classified as a) A percentage of the sales charges paid by purchasers. b) A portion of a fund's CDSC. c) A cost to the sponsor. d) An operating expense of the fund. The investment adviser fee is the largest single operating expense of a mutual fund.

c

#46. Which of the following describes developmental oil and gas drilling programs? a) Return potential is greater than that offered by exploratory drilling. b) They combine exploratory and developmental drilling. c) Drilling takes place in proven areas. d) Depletion allowance is not available for this type of drilling. "Developmental" means drilling in areas that have proven oil and gas reserves; therefore, the risk of a dry hole is much less than drilling in totally unproven areas (called exploratory or wildcat drilling). But, because the drilling is being done in an area with less risk, the return potential is less than exploratory drilling. Depletion is just as allowable here as in any oil/gas program. A combination program combines both exploratory and developmental drilling.

c

#47. An associated person was originally registered in 2014 and it is now 2020. When is the next time the individual would be required to take Regulatory Element training? a) 2020 b) 2021 c) 2022 d) 2024 Regulatory Element training is due on the second anniversary of original registration and then every 3 years thereafter. The next time this associated person would be required to complete the training is 2022 (2014 + 2 + 3 + 3).

c

#48. An income statement a) Lists assets and liabilities of a company. b) Quantifies the value of property, plant and equipment. c) Covers financial activity over a period of time. d) Shows a financial position at a specific point in time. An income statement is a financial statement that shows a company's performance over a specific accounting period (such as a quarter or a fiscal year). The other choices all describe a balance sheet, which is a snapshot of a company's financial status at a specific point in time. A balance sheet summarizes the value of a company's assets, liabilities and shareholders' equity. Property, plant and equipment represent assets of a company.

c

#5. If a customer purchases securities and does not settle the account in 4 business days, the brokerage firm's first order of business is to a) Notify FINRA and the exchange. b) Freeze the account for 90 days. c) Cancel the trade and sell the purchased securities. d) Notify the SEC. The firm immediately cancels the order and sells the securities. The customer's account is then frozen for 90 days in accordance with Regulation T.

d

#51. Shares of stock that have actually been sold to the public are known as a) Treasury stock. b) Outstanding stock. c) Authorized stock. d) Issued stock. Issued shares are the amount of stock that has been sold to the public.

b

#58. If an investor is considering working with a registered representative, which resource is available to review the person's professional background? a) EDGAR b) BrokerCheck c) SEC d) NASAA FINRA's BrokerCheck database is a resource for investors to check the credentials of people and firms in the securities industry.

b

#6. The shareholders of a mutual fund have certain rights associated with the ownership interests they hold in the company. These rights include all of the following EXCEPT a) Election of board. b) Approval authority for the company's annual report. c) Approval of investment advisory agreement. d) Voting rights/proxy rights regarding company issues. This is an EXCEPT question. Mutual fund shareholders have the right to receive annual/semiannual reports; however, the company itself has approval authority for its publication. The shareholders approve the investment advisory agreement, have voting rights regarding company issues and elect board members. Additionally, they approve changes in investment objectives, policies, and fees, and ratify the selection of independent auditors.

a

#6. With respect to advisory fees, an investment advisor may not charge the client a fee that would a) Be considered unreasonable by a prudent individual. b) Exceed the planned rate of return on the portfolio to be managed. c) Result in a declining balance on an asset management account. d) Require a client to pay finance charges on an account balance being maintained. An investment advisor may not charge a client a fee that would be considered unreasonable by a prudent individual or that would not be competitive.

d

#60. An option contract that gives the holder of the contract the right to sell the underlying security at the strike price is a a) Strike option. b) Short stock position. c) Call option. d) Put option. A put option contract gives the holder of the contract the right to sell the underlying security at the strike price.

a

#61. XYZ Corporation is planning an add-on offering. XYZ currently has outstanding shares and is now raising additional capital to build a new manufacturing plant. The quiet period during which no research may be published on XYZ will last for how many days? a) 3 days after the effective date b) 10 days after the effective date c) 30 days after the effective date d) 40 days after the initial filing of the registration statement The quiet period for an add-on offering is 3 days after the effective date. This is the time period during which no research may be published on XYZ to prevent influencing the market value of their stock.

c

#62. Which of the following is true regarding a private securities transaction? a) Associated persons are allowed to participate in private securities transactions at any time. b) It is also known as "controlled business." c) It is a violation of Conduct Rules. d) It is a transaction within the normal business activities of the member firm. Private securities transactions are defined as transactions that take place outside the normal business activities of the member firm and are not recorded on the firm's books and records. This is known as "Selling Away," and is a violation of FINRA Conduct Rules. However, transactions among immediate family members are allowed if the associated member does not receive any compensation. In addition, personal transactions in investment company and variable annuity securities are permitted.

c

#63. Which of the following is NOT a risk factor in a limited partnership of a DPP? a) Audits b) Conflicts of interest with the sponsor c) Limited liability d) Liquidity Limited partnerships (LPs) are a common type of direct participation program (DPP) and are generally illiquid. The IRS audits a very high percentage of them, and may revoke limited partnership status. Often, the general partner is the sponsor of numerous programs at the same time, creating potential conflicts of interest. Limited liability is one of the beneficial features that an LP offers investors

c

#66. A designated market maker receives an order to buy XYZ 200 shares 20 stop 19. This means that a) The designated market maker is prevented from buying, unless the market is at or below 19. b) The order is stopped at or below 20 and filled at or above 19. c) The order is triggered at or above 20 and filled at 19 or lower. d) The order will be filled if the market moves successively lower from 20 to 19. Buy stop limit order: stop at 20 or above, execute at 19 or below.

b

#67. A variable life insurance policy states all of the following EXCEPT a) Current and maximum mortality costs. b) Current and minimum guaranteed cash value. c) Current and maximum investment management fee. d) Current and maximum administrative expenses. Variable life policies do not guarantee cash values. All the other choices are charges and expenses detailed in a variable life policy.

a

#67. All of the following are grounds for statutory disqualification EXCEPT a) Any misdemeanor in the last 5 years. b) Any felony in the last 10 years. c) Lying on the Form U4. d) Being barred by another SRO. Only securities-related or theft-related misdemeanors are grounds for statutory disqualification. All the other activities are grounds for statutory disqualification from membership or association.

c

#68. All of the following describe the Municipal Securities Rulemaking Board (MSRB) EXCEPT a) Regulates municipal advisors. b) Principal regulator of the municipal securities market. c) Regulates state and local government issuers of municipal securities. d) Writes rules and regulations for municipal firms. This is an EXCEPT question. MSRB does not regulate or govern issuers of municipal securities. As the principal regulator of the municipal securities market, it regulates the activities of broker/dealers, banks that buy, sell and underwrite municipal securities, and municipal advisors.

b

#7. A mutual fund's custodian a) Issues new shares and redeems old shares. b) Safeguards fund cash and securities. c) Safeguards portfolio records. d) Disburses dividends The custodian safeguards the mutual fund's portfolio assets. The transfer agent processes shares and disburses dividends. The investment adviser maintains portfolio records.

b

#71. The board of directors declares a dividend on Wednesday, Oct. 5, to shareholders of record as of Thursday, Oct. 20. If an investor purchased the stock on Thursday, Oct. 20, in a cash transaction, which of the following statements would be true? a) The investor would not be entitled to the dividend because the stock was purchased on the record date. b) The investor would be entitled to receive the dividend because the stock was purchased using cash settlement. c) The investor is entitled to the dividend as long as the shares are purchased on or before the record date regardless of the type of settlement used. d) The investor would not be entitled to the dividend because the shares were purchased after the ex-dividend day which would have been Tuesday, October 18. An investor that purchases the shares on the record date for cash settlement is the owner of record as of that date. The investor is therefore entitled to the dividend. For cash transactions, the ex-dividend date is the day after, not the day before, the record date. The way to remember this is to remember the acronym DREP (Declaration, Record, Ex-date, Payable).

b

#72. The equation for outstanding stock is a) Authorized shares minus unissued shares. b) Issued shares minus treasury stock. c) Authorized shares minus treasury stock. d) Issued shares minus unissued shares. Outstanding Stock = Issued Shares - Treasury Stock. Remember that treasury stock, which is stock that has been issued (sold to the public) and subsequently bought back by the corporation, must be subtracted from the shares that have been issued.

a

#73. The date the board of directors authorizes a dividend is the a) Declaration date. b) Payable date. c) Ex-dividend date. d) Record date. The dividend is authorized on the declaration date.

d

#74. What are the tax consequences of changing from one fund to another within a family of funds? a) It is not a taxable event. b) It may not be a taxable event if exchanged at the same NAV. c) It is tax-deferred. d) It is a taxable event because it is a purchase and sale. The exchange privilege of a family of mutual funds normally permits the sale of the shares of one fund and the purchase of the shares of another fund to occur at net asset value. The tax consequence results from the sale of fund shares compared with their original purchase price.

a

#8. A 50-year-old individual needs $20,000 for his child's education, and wishes to withdraw the necessary funds from his traditional IRA. Which of the following statements is true concerning taxation on the withdrawal? a) The entire amount will be taxed as ordinary income. b) The withdrawal will be subject to regular income tax and a 10% penalty tax. c) Regular income tax on withdrawals in excess of his basis will apply, but no penalty tax. d) A 10% penalty tax will be assessed for early distribution. Withdrawals from a traditional IRA are subject to regular taxation. In addition, a 10% premature withdrawal penalty is assessed on anyone withdrawing the money under age 59½. However, the penalty will be waived if the distribution is due to the owner's death or disability, for medical or education expenses and first-time home ownership. The withdrawal is still subject to taxes as ordinary income.

c

#8. What is an underwriter's maximum sales charge on a limited partnership (LP)? a) 8% b) 8½% c) 10½% d) 12% The maximum permissible sales charge on limited partnership (LP) interests is 10% plus ½% for due diligence expenses.

a

#9. A grandfather wants to buy an annuity that will provide the best benefit to both his son and granddaughter. What annuity type would best suit his needs? a) Joint and last survivor b) Life income only c) Life income period certain d) Joint annuity in the names of both his son and granddaughter The joint and last survivor annuity would make payments to the son and then the granddaughter, or the granddaughter and then the son, as long as one of them survives.

a

#9. When an option writer covers a position by purchasing an option, it is a(n) a) Closing purchase. b) Opening sale. c) Closing sale. d) Opening purchase. If the investor is the writer of an option, which is the same as being short, he can close his position by buying an options contract.