Final Exam 4
A individual has a mix of small-cap growth stocks, large-cap stocks from mature industries, investment-grade bonds, speculative bonds, preferred stock, and foreign securities. She is attempting to reduce:
Market risk: Market risk is reduced (not eliminated) by investing in different asset classes. The more random the correlation between the different asset classes, the greater the overall reduction in market risk. A high positive correlation between the asset classes equates to high market risk.
The Municipal Securities Rulemaking Board (MSRB) does NOT regulate which of the following?
Municipal issuers: The MSRB has the power to regulate municipal securities broker-dealers, their personnel, and their municipal securities communications with the public. However, the MSRB doesn't have the authority to regulate municipal issuers.
Which of the following securities are exempt from registration?
Municipal securities: Municipal bonds are exempt from registration under the Securities Act of 1933. Corporate securities that are to be sold publicly are typically required to be registered.
Preferred dividends:
Must be satisfied before common dividends: Preferred shares receive dividends before the common stock dividends can be paid. However, a company doesn't guarantee preferred dividends will be paid each year.
If a registered representative (RR) of a member firm intends to open an account with another member firm, the RR:
Must provide written notice of her affiliation with another member firm to the firm with which she intends to opens the account and must obtain the written approval from her employing firm: When seeking to open an account with another member firm, the employee must provide written notice to the firm with which she intends to open the account. Additionally, she must obtain the written approval from her employing broker-dealer. If the employer provides approval, the firm may request duplicate confirmations of trades and account statements. These provisions extend to the spouse and/or minor children of the employee. In reality, firms could institute internal house rules that prohibit outside accounts.
A customer who has consistently invested in mutual funds is considering a first-time investment in a hedge fund. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE?
Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately: Both mutual funds and hedge funds pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.
A registered person who is employed by a broker-dealer has committed an offense that makes the person subject to statutory disqualification. The firm is MOST likely to take which of the following actions?
No longer permit the person to be associated with the member firm: As a general rule, any person who is subject to statutory disqualification may not be associated with a FINRA member firm in any capacity, even in a non-registered capacity. The firm is also required to report the event to FINRA. The member firm may request an eligibility proceeding to determine whether the person can remain in a registered capacity; however, there is no guarantee that the request will be granted. If the employee is terminated, the firm will file a Form U5.
A registered representative purchased two tickets to a concert for which he paid $175 per ticket. If the face value of the tickets is $95 per ticket, the RR may:
Not give any tickets to a customer: Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. The gifts should be valued at the higher of the cost or market value. If tickets to the concert have a face value of $95, but the tickets were purchased at a value of $175, the higher value would be used. Since the value of each ticket exceeds $100, none of the tickets may be given to the customer. If the RR attended the event with the customer, it would be a business expense and not a gift.
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.
Regular-way settlement for equity options is normally completed within:
One business day after the trade date: Regular-way settlement for options is generally completed within one business day from the trade date, or (T + 1).
A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares:
Over a 90-day period: Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, the customer may sell these shares within 90 days.
Which of the following is the rate that commercial banks charge their best corporate clients?
Prime rate: The prime rate is the rate commercial banks charge their best corporate clients. The discount rate is the rate that the Federal Reserve charges when lending to member banks. The federal funds rate is the rate charged for overnight loans between member banks. The call rate is what commercial banks charge on loans to broker-dealers for margin purposes.
Which of the following choices is NOT a leading economic indicator?
Prime rate: The prime rate is the rate that banks charge their most creditworthy customers, typically corporations. The prime rate is considered a lagging economic indicator, while the other three choices are all considered leading economic indicators.
A client purchased 1,500 shares of stock from a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n):
Principal capacity and charged the client a markup: A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the client a markup or markdown. When acting in an agency capacity, the broker-dealer will normally charge the client a commission.
If a customer wishes to open an account to trade options, the account must be approved:
Prior to the time an initial order is accepted: If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.
Which of the following is a benefit of investing in mutual funds?
Professional management of investments: Investing in mutual funds is a way for individuals to own a small amount of a large portfolio of securities. In addition, the fund's investment's will be selected and managed by a professional investment advisers. Securities offer variable, not guaranteed, rates of return. Both sales charges and management fees are paid by investors and ultimately reduce their rate of return.
When purchasing mutual fund shares, the ability to receive cumulative quantity discounts is referred to as:
Rights of accumulation: The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Rather than using the original purchase price, the current market value of the investment plus any additional investments are used to determine the applicable sales charge. A letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.
Which of the following statements is TRUE?
SIPC covers broker-dealer bankruptcy, while the FDIC covers bank deposits: SIPC protects customers of a broker-dealer in the event the firm declares bankruptcy. However, the FDIC protects bank depositors in the event the bank cannot pay its banking customers.
A town has started the construction of public sewers. This project is likely paid by a(n):
Special assessment bond: Public sewers are often built with the proceeds of a special assessment bond. A special assessment is a charge against property that receives a benefit from the improvement. The ongoing cost of operating and maintaining the sewer system plus the payment of debt service on sewer bonds issued for this purpose, may be paid from property taxes or fees.
A person is completing a Form U4 to become registered and notices that the document requires his signature. The person has an aversion to signing legal documents that he doesn't fully understand. For clarification on the details of the form, he calls his brother who is a lawyer and specializes in employment law. The brother indicates that if Form U4 is signed, a person is agreeing to:
Submit potential disputes with the firm, other member firms, customers, or associated persons to arbitration rather than litigation: Submit potential disputes with the firm, other member firms, customers, or associated persons to arbitration rather than litigation
Which of the following features applies to a variable annuity, but not to a mutual fund?
Tax-deferred growth: For investors, one of the key benefits of a variable annuity is tax-deferred growth. Mutual funds do not have this feature.
A qualified plan has all of the following characteristics, EXCEPT:
Tax-free distributions: Qualified plans allow for tax-deferred growth, pre-tax contributions, and non-discrimination of participants. However, the plans do not provide for tax-free distributions. Instead, distributions of previously untaxed money are taxed at ordinary income rates when received.
Which of the following statements is NOT TRUE about Forms 10-K and 10-Q?
The 10-K contains financial information, while the 10-Q contains voting information: A Form 10-K is an annual filing by companies, while a Form 10-Q is a quarterly filing. Both forms provide financial information about a company and must be forwarded to shareholders if requested. A Form 10-Q contains an earnings report for each of the first three quarters, but a Form 10-K provides the earnings for the full year. The proxy is the form that contains voting information.
The 5% Markup Policy applies to:
The 5% Markup Policy does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus would be required for a primary distribution as well as a registered secondary distribution. Securities quoted on Nasdaq would be the only choice given for which the 5% guideline would apply.
When watching for signs of inflation, which of the following is one of the most relevant statistics?
The Consumer Price Index: The Consumer Price Index (CPI) measures the price of a basket of goods and services available in the U.S. When it is increasing, it is considered a sign of inflation, which is a general rise in the level of prices.
Who must provide written approval before a registered representative (RR) can place a mutual fund advertisement which will be widely disseminated?
The RR's registered principal: FINRA considers advertisements to be a form of retail communication. Retail communications are defined as written or electronic communication that's distributed or made available to more than 25 retail investors. Advertisements must be approved by a registered principal of a broker-dealer before they're used. In some cases, retail communication is filed with a regulator; however, an RR is prohibited from indicating that an advertisement has been "approved" by any of the regulators.
A 55-year-old investor has earned $55,000 in pension income and $1,500 from a part-time job this year. How much can she contribute to her IRA?
$1,500: IRA contribution limits are currently $6,000 or 100% of earned income, whichever is less. For individuals who are age 50 or older with sufficient earned income, an additional $1,000 can be contributed. In this question, the investor's pension income is not considered earned and cannot be invested in an IRA. Since her earned income is only $1,500, that's the maximum amount that she can contribute.
What is the maximum contribution that can be made to a 529 plan without being subject to gift taxes?
$150,000 from a married couple if no further contributions are made for the next five years: In a 529 plan, contributions are based on the amount that can be gifted without any tax implication to the donor. Currently, this amount is $15,000 per person, per beneficiary. Contributions to 529 plans can be front-loaded with five years of contributions without penalty. This means that $75,000 (5 x $15,000) per person can be contributed, which can be doubled to $150,000 for married spouses. Prior to 2018, the maximum was $14,000 per year, with $70,000 front-loaded
What is the maximum loss for an individual who purchases an option?
100% of the premium: When an option is purchased, the investor pays 100% of the premium. If the option expires, the investor will experience the maximum loss of the premium paid.
After a registered person resigns or is terminated from a member firm, the firm is required to notify FINRA within:
30 days on Form U5: After a registered person resigns or is terminated from a member firm, the firm is required to notify FINRA within 30 days by filing Form U5. Form U5 will provide the applicable details of the termination.
A stock closes at $37. The next day the stock sells ex-dividend $0.68 per share. At what price will the stock open the next day if it opens at the same level it closed the day before?
36.32: The price of a stock is reduced by an amount sufficient to cover the dividend. The price will be reduced by 68 cents. Therefore, $37 - .68 = $36.32.
The most recent transaction in ABC 6.50x 2050 was at 95. This bond is trading at:
A discount: The bond's last trade was done at a price of 95 or 95% of par, which is a discount. The 6.50 represents the bond's interest rate and 2050 is the bond's maturity date. The "x" is simply a placeholder and doesn't give any information about the bond.
Which of the following statements about orders is TRUE?
A market order to sell is executed immediately at the best available price: Market orders are executed immediately at the best available price at the time they are entered (market orders don't specify a price). A limit order to buy can only be executed at a specified price or lower, while a limit order to sell can only be executed at a specified price or higher.
The OTC Bulletin Board (OTCBB) is BEST defined as:
A quotation system for securities that are not listed on either the NYSE or Nasdaq: The OTC Bulletin Board (OTCBB) is a quotation system for securities that are not listed on either the NYSE or Nasdaq. The OTCBB has no listing requirements and it's not an exchange. The system doesn't provide the execution services; instead, the equity traders from broker-dealers can either contact the dealer that has provided the quote by telephone or through a proprietary electronic delivery system. The companies whose stock is quoted on the OTCBB either don't meet the requirements for listing on an exchange or they've been delisted from an exchange. A similar system is the Pink Marketplace. The third market refers to exchange-listed securities that are traded over-the-counter or away from traditional exchanges.
Which of the following statements is TRUE regarding stock dividends?
A stock dividend increases the number of shares the holder will own: The only true statement is that a stock dividend increases the number of shares the holder will own. A stock dividend reduces the cost basis per shares of an investor's overall stock position. The tax liability for the additional shares received is only realized when the shares are subsequently sold. A company can pay a stock dividend regardless of whether a cash dividend has been paid.
The growth in the value of a variable annuity is:
Allowed to accumulate on a tax-deferred basis: The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.
Which of the following amounts may a customer contribute each year to a 529 college savings plan without incurring any taxes?
An amount equal to the annual gift tax exclusion: States that offer 529 plans determine the specific plan rules, such as allowable contributions, investment options (e.g., mutual funds), and the deductibility of contributions for state tax purposes. On an annual basis, a person may contribute to a 529 college savings plan up to the federal annual gift tax exclusion ($15,000) without paying a gift tax. Another choice is that the contributor can make a single, lump-sum gift of up to the five-year cumulative limit ($75,000) for tax free gifting.
Which of the following securities assist in financing importing and exporting operations?
Bankers' acceptances (BAs): Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt), which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.
All of the following statements are TRUE regarding an account that's held as tenants in common, EXCEPT:
Both owners are required to have an equal share of the assets: Joint accounts allow for multiple owners, but they don't need to share equally in the account. An account that's held as tenants in common is divided upon the death of one of the owners. The distribution of assets is determined by the deceased's (i.e., decedent's) will or, if no will exists, state law. Tenants in common can be used for any number of people and is often used for businesses.
How can a client minimize principal risk in bonds due to fluctuating interest rates?
Buy short-term maturities: If an investor buys bonds that have short-term maturities, this will minimize loss in principal due to fluctuating interest rates. The prices of short-term bonds will fluctuate in response to interest rate swings less than the prices of long-term bonds. In addition, premium bonds (those priced above par) are less volatile than discount bonds (those priced below par).
Which of the following is the best hedge for a long stock position?:
Buying a put: To hedge (protect) a long stock position, an investor should buy a put. If the value of the stock position declines, the put could be exercised which allows the investor to sell the stock at the option's strike price.
Which of the following is NOT a type of direct participation program (DPP)?
C Corporation: Direct participation programs come in many different forms, including S Corporations, general partnerships, and limited partnerships. However, C Corporations do not offer flow through taxation. Instead, income is taxed first at the corporate level and taxed again if it's distributed to shareholders as a dividend.
A registered representative has just been called up for active military duty. What is his Continuing Education (CE) status?
CE requirements are deferred until his active duty ends: Both the Regulatory and Firm Elements of Continuing Education are deferred during active duty. The time element that typically applies to registered persons for CE is tolled (taken away) during the period of active military service. Therefore, the requirement to sit for the Regulatory Element of CE, based on the second anniversary of initial registration and each three years thereafter, is halted while the person is in active military service and won't resumes until the individual's special inactive status ends.
All of the following are offered by an issuing corporation, EXCEPT:
Call options: Call options are not issued by a corporation; instead, many options are issued by the Options Clearing Corporation (OCC) and entered into by two investors (i.e., the buyer and seller). When securities are created this way, they're referred to as derivatives. Rights, warrants, stocks, and bonds are all initially created by a corporation.
Which of the following risks affects bonds primarily when interest rates decline?
Call risk: When interest rates decline, bond issuers are more likely to call in existing, higher interest rate bonds and replace them by issuing bonds paying lower rates. Investors whose bonds are called are then faced with reinvesting their principal at lower rates.
A tax payment is required for which of the following events?
Cash dividend: Cash dividends are taxable in the year in which they are received. However, any tax implication for a stock dividend is delayed until the additional shares are subsequently sold. Taxes are paid on realized gains, but unrealized capital gains or losses (paper profits or losses) have no impact on an investor's tax situation. Return of capital occurs when an investor receives a portion of her original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.
Which of the following choices has the lowest priority of claims in a bankruptcy?
Common stock: In the event a corporation goes bankrupt and it must liquidate its assets, secured bondholders or creditors would be paid first (secured bonds are backed by specific tangible assets), then owners of debentures (unsecured bonds backed by the full faith and credit of the issuing corporation). Bondholders are paid first, as they are considered creditors. Stockholders are paid next, with preferred stockholders being third in this order of priority and common stockholders paid last.
During periods of high inflation, which investments will typically provide the best returns?
Common stocks: Common stocks have historically been a hedge against inflation. Investments with a fixed rate of return (e.g., bonds and fixed annuities) typically perform poorly when inflation rises.
An individual's close relative, who was a resident of London, England, died six months ago. The client expects to receive an inheritance of a large sum of money. What is the fundamental risk the individual is concerned about?
Currency risk: The fundamental risk is currency risk, since the proceeds from the liquidation of the decedent's estate will be paid in British Pounds. At the time of the estate's settlement, if the value of the U.S. dollar is greater than the British Pound, the client will receive fewer U.S. dollars when the British Pounds are converted.
Which of the following statements is NOT TRUE of a Coverdell Education Savings Account?
Distributions can only be made for higher education expenses: The statement, "Distributions can only be made for higher education expenses" is NOT TRUE. Remember, distributions from Coverdell Education Savings Accounts are permitted for elementary and/or higher education expenses.
Preferred shares:
Don't have the right to vote: Preferred shares receive dividends before the common shares. In addition, preferred shares will be paid before common shares if the company declares bankruptcy (i.e., if the firm is liquidated). However, the bondholders are paid before the preferred shares in bankruptcy. Typically, only common shareholders of a company receive the right to vote in corporate elections.
Which of the following dates represents the first day an investor can purchase a stock and not be entitled to its dividend distribution?
Ex-date: The ex-date is the first date on which a stock trades without its dividend included in the price. For regular-way trades (those that settle in two business days), the ex-date is one business day prior to the record date. For a purchaser to receive a dividend distribution, she must buy the stock (execute the trade) by no later than the business day prior to the ex-date.
Churning is BEST defined as:
Excessive trading activity in a customer's account: Churning is defined as excessive trading in a customer's account. Although the word excessive is not specifically defined, it's generally judged based on the customer's investment objectives and financial situation. Selling shares of an investment company just below the amount at which a customer would receive a quantity discount is referred to as a breakpoint sale. Charging a customer a higher-than-normal markup on a transaction is an example of excessive markups. Failing to honor a firm quote is an example of backing away. All four of these activities are prohibited practices.
Which term is used to describe the price at which a call owner can buy a stock?
Exercise price: For a call option, the exercise or strike price is the price per share at which a buyer of the contract can purchase the underlying stock. The option's premium represents the price paid to acquire the option contract.
The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities?
FHLMC (Freddie Mac) securities: The U.S. government guarantees the payment of interest and principal on all Treasury securities as well as securities that are issued by the Government National Mortgage Association (GNMA or Ginnie Mae). Securities that are issued by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), which is a government-sponsored enterprise (GSE), are not guaranteed or backed by the U.S. government.
If a financial institution receives more than $10,000 in cash from one customer during one business day, what action is required?
File a Currency Transaction Report (CTR): A broker-dealer or bank that receives more than $10,000 of cash from one customer during one business day, it must file a Currency Transaction Report (CTR). Although the transaction may be suspicious and require the filing of an SAR, SARs are not filed with the SEC. Both the SAR and CTR are required under the USA PATRIOT Act and are filed with the Financial Crimes Enforcement Network (FinCEN), which is a department of the Treasury. Under the USA PATRIOT Act, there's no requirement to place a five-day hold on the customer's funds. Since the question states that cash is being deposited, not transferred, a cash transfer receipt is not required.
To apply for securities registration, a previously unregistered individual must complete:
Form U4: To apply for securities registration, a person must file Form U4 with FINRA. Form U5 is filed when a registration is terminated. Form U6 is filed by an SRO (e.g., FINRA), but not by a member firm, to report disciplinary actions against broker-dealers and RRs. Form BD is filed by brokerage firms to register with FINRA, the SEC, and states.
A registered representative is aware of a large order sitting on the firm's institutional trading desk. He decides to execute an order for his own account before the institutional order is entered. This practice is known as:
Frontrunning: Each of these practices are considered prohibited. Although knowledge of this order may not be public, the execution of an order ahead of a customer order in an effort to make a profit or protect against a loss is known as frontrunning—not insider trading. Insider trading is based on material non-public information concerning an issue of securities. Interpositioning is placing another broker-dealer between yourself and the customer, which generally results in an increase in execution costs and a detriment to the customer. Pegging is setting a floor on how low a security can go and unless it involves stabilization, this practice is considered manipulative.
Which of the following securities is exempt from registration?
Government agency securities: U.S. government agency securities (e.g., GNMA, FNMA, FHLMC bonds) are exempt from registration under the Securities Act of 1933. Corporate securities that are to be sold publicly are typically required to be registered. Keep in mind, treasury stock is simply stock that was issued by a corporation which has since been repurchased by the corporation.
When warrants are issued, the exercise price is:
Higher than the current market price of the stock: Warrants are typically issued with a strike price that's higher than the current market price of the stock (i.e., at a premium).
When is a broker-dealer permitted to pay a commission to an unregistered person?
If a retired representative has a contract and only receives commissions on existing accounts: Generally, unregistered persons cannot be paid a commission by a broker-dealer. However, retiring representatives can continue to receive commissions after terminating employment, but only if they signed a contract with the broker-dealer and commissions are based on accounts that were opened before the registered representative retired.
A broker-dealer's anti-money laundering (AML) compliance program must be approved:
In writing by a member of senior management: Each member's AML program must be approved in writing by a member of senior management.
A person hears sensitive news regarding a publicly traded company before it's disseminated to the public. If this person sold his stock, the prohibited practice that he has engaged in is referred to as:
Insider trading: Any person, not just employees of brokerage firms, who uses material, non-public information to make a profit or avoid a loss is subject to insider trading sanctions. This also includes any person who acquires and passes the information along (tippers), as well as any person who receives and uses the information (tippees).
A bond is selling at a discount and yields have remained constant. As the bond gets closer to its maturity, what happens to its price?
It increases: Although fixed income securities are subject to some degree of interest rate risk, that risk is of less concern if the bond is being held to maturity. Assuming there is no default by the issuer, the price of a bond that is selling at a discount will increase (move towards par value) as it gets closer to maturity.
A retail salesperson has helped his firm win the role as the lead underwriter for a local municipal bond issue. If the underwriting is being conducted on a negotiated basis, which of the following statements is TRUE?
It is a violation of MSRB rules if the retail salesperson had made a $300 political contribution to a local elected official of this issuer within the past two years: Since the retail salesperson has helped his firm obtain negotiated municipal bond business, he is defined as a municipal finance professional (MFP). A two-year look-back period applies to any political contributions that are made by municipal finance professionals. If a person has made contributions to a political candidate that would have resulted in a violation of MSRB Rule G-37 (contributing more than $250 to a candidate for whom he is entitled to vote), the firm that employs the person is subject to the underwriting ban, but only if the person was employed in the role of an MFP within two years of the contribution. A retail salesperson is not required to register as a Municipal Securities Principal and is permitted to solicit elected officials of municipal bond issuers as long as the person does not contribute more than $250 to the official for whom he is entitled to vote.
If an investment's distribution increases by 3% while inflation has increased by 3%, what's the impact on the investment's purchasing power?
It stays the same: When an investment's distribution increases by the same amount as inflation, the purchasing power remains the same. If inflation outpaces an investment's return, the purchasing power will decrease. If the rate of inflation is lower than an investment's return, the purchasing power will increase.
An increase in which of the following choices will cause an increase in the expense ratio for an investment company?
Management fees: The expense ratio depends on the fees that are charged against the net assets of the fund. The only fee listed in this question is the management fee.
A portfolio of debt instruments will be the most stable when:
The bonds have short maturities: When compared to long-term bonds, short-term bonds are less volatile, tend to have more stable prices, and are one of the safest investments. Based on the inverse relationship between bond prices and interest rates, if interest rates rise, all bond prices will fall and, when interest rates fall, all bond prices will rise. However, long-term bonds will increase or decrease more (i.e., are more volatile) than short-term bonds.
The SEC established Regulation S-P to provide for customer privacy. According to Reg. S-P, what information is a broker-dealer required to include in its customer privacy notices?
The broker-dealer's policies that have been created to protect the security of the customer's private information: Regulation S-P was enacted to ensure that a customer's non-public information is protected. Broker-dealers are required to establish policies that are designed to protect their client's information. Those policies must be disclosed in a privacy notice and sent to customers. In some cases, broker-dealers are permitted to share a customer's information; however, customers are given the opportunity to opt out and refuse the sharing of information. Broker-dealers cannot charge a customer who wants to opt out.
If a bond is currently selling at a premium, then:
The current yield is lower than the nominal yield: Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $1,100. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 7.27%. $80 / $1,100 = 7.27%
When determining the suitability of the recommendation of a 529 college savings plan, which of the following should a registered representative consider?
The deductibility of contributions from state income taxes: Contributions to a 529 plan are non-deductible at the federal level; however, if an investor uses his home state's plan, contributions are often deductible for state income taxes. If an investor uses assets from a 529 plan for qualified education expenses, the earnings are tax-free at the federal level (i.e., like a Roth IRA). Unlike an UGMA or UTMA account, 529 plan assets don't need to be transferred when the beneficiary reaches the age of majority.
The Investment Advisers Act of 1940 regulates which of the following?
The fee charged by an accountant for providing advice concerning securities: The Investment Advisers Act of 1940 regulates firms that are established as investment advisers (IAs). The Act both defines the term investment adviser and provides a number of exclusions from the IA definition. Examples of investment advisers include firms that manage mutual fund portfolios as well as firms that manage wrap accounts and collect a single fee to cover the costs related to investment advice along with the costs of transactions. Exclusions from the IA definition are available to broker-dealers, specific types of professionals (lawyers, accountants, teachers, engineers), and publishers. However, for the professionals to be excluded, the investment advice being provided must be incidental to their actual profession. For example, if an accountant decides to hold himself out to the public as an investment adviser and charge a separate fee for that service, the exclusion will not apply. On the other hand, if an account collects a fee for completing and filing a client's tax return, he is not considered to be acting as an investment adviser.
Which of the following stipulations is NOT included in a letter of intent?
The fund may stop redemptions during the duration of the letter of intent: A letter of intent (LOI) has a maximum duration of 13 months and may be backdated for up to 90 days to include previous purchases. Also, to protect against the client's failure to fulfill the letter of intent, a certain amount of the initially purchased shares may be placed in an escrow account by the customer's broker-dealer. If the terms of the letter are not met, the shares in the escrow account will be liquidated and used to cover any additional sales charges that are due. The letter of intent will not contain a clause which stipulates that redemptions are prohibited during the 13-month period.
In order for the sale of stock from a joint account to be considered good delivery:
The stock power must be signed by all of the owners: When selling stock, it's often recommended to send unsigned certificates separately from the signed stock powers to avoid theft. If the stock is owned in a joint account, all of the owners must sign either the stock power or the stock certificate to be considered good delivery.
An RR must attempt to obtain all of the following information about customers, EXCEPT:
Their educational background: There is no requirement to attempt to obtain a client's educational background.
In what way are mutual funds and REITs similar?
They are actively managed: Mutual funds and REITs both have portfolios that are managed, with investments that are purchased and sold on a regular basis. REIT securities trade on exchanges, but mutual fund shares do not. Instead, mutual fund shares are redeemable by the issuer. Neither mutual funds nor REITs offer flow through of losses.
Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)?
They are designed to deliver the opposite of the performance of an index or other benchmark: An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA seeks to deliver opposite performance of that index. So, if the DJIA rises by 1%, an inverse ETF would decrease by 1%, and if the DJIA falls by 1%, the inverse ETF would increase by 1% before fees and expenses. A regular ETF is designed to deliver the same performance as an index or other benchmark. A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. A leveraged inverse ETF is designed to deliver a multiple of the opposite performance of an index or other benchmark.
Which of the following is TRUE for the writers (sellers) of call options?
They have the obligation to sell 100 shares of stock: Writers (sellers) call options have the obligation to sell 100 shares of stock at the strike price if exercised against.
Which of the following statements is correct regarding official statements?
They may be found on the MSRB's EMMA system: Municipal official statements may be found on the MSRB's Electronic Municipal Market Access (EMMA) system. EMMA operates as an electronic storage portal.
Why do regulators require broker-dealers to establish information barriers?
To prevent confidential information from spreading from one department to another: Information barriers are designed to prevent confidential information from spreading from one department to another.
The cash flow received from dividends and/or interest, plus any appreciation or depreciation in the value of an investment, is referred to as the:
Total return: The total return calculation takes into account all of the cash flow received from dividends and/or interest, plus any appreciation or depreciation in the value of the investment. This return is expressed as a percentage and is typically calculated over a period of one year.
A quote of 5.90 - 5.75 is a quote for which of the following securities?
Treasury bills: Treasury bills are quoted on a discount yield basis while the other choices are quoted at a price. Since yield is inversely related (moves opposite) to price, the higher yield (5.90) represents the lower price and is the bid. The lower yield (5.75) represents the higher price and is the ask (offer). The other securities are all quoted as a percentage of par in 32nds.
A registered person's FINRA registration has become inactive because her firm is no longer in business. Unless she becomes employed by another member firm, she will be required to requalify by examination after
Two years: If an individual's registration becomes inactive, she can avoid being required to requalify by examination if she becomes employed with another member firm within two years. For this question, the fact that the firm is no longer in business is irrelevant.
Discretionary accounts require:
Written authorization from the customer: Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.
