Review: Chapters 1-4

An employee wants to invest funds into a 401(k) that is sponsored by his employer. Assuming the employee waits until he reaches the age of 60 to begin taking distributions from the plan, what is the tax treatment of these funds? A 100% is taxable since the plan has a zero cost basis B 100% is tax-free depending on the client's age C Contributions are able to be withdrawn tax-free and the earnings portion is taxed as ordinary income D A portion of the distribution is taxable at ordinary income rates and the remainder is taxed at a maximum rate of 20%

A 100% is taxable since the plan has a zero cost basis A 401(k) plan is generally funded with pre-tax dollars, which means that the contributed funds have not yet been taxed. Another benefit of a 401(k) plan is that it offers tax-deferred growth. Therefore, 100% of both the original contributions and the earnings are taxed at ordinary income rates when the funds are distributed in the future. For this reason, a 401(k) has a zero cost basis.

Which of the following statements is NOT a characteristic of an electronic communication network (ECN)? A ECNs act as market makers B ECNs permit trading electronically C ECNs permit trading anonymously D ECNs permit trading after-hours

A ECNs act as market makers ECNs act in an agency capacity and will not buy or sell for their own account as with a market maker.

When liquidating a corporation's assets, in which order are claims satisfied? A Secured bondholders, preferred stockholders, common stockholders, general creditors B Secured bondholders, general creditors, preferred stockholders, common stockholders C General creditors, secured bondholders, common stockholders, preferred stockholders D Common stockholders, preferred stockholders, secured bondholders, general creditors

B The order in which claims are satisfied when liquidating a corporation's assets is: Secured bondholders General creditors Preferred stockholders Common stockholders

A municipal tombstone advertisement must be approved by: A The MSRB B A municipal securities principal C A municipal securities principal and the branch manager D A municipal securities financial and operations principal

B A municipal securities principal MSRB rules require that an advertisement must be approved prior to its first use by a municipal securities principal.

Which of the following factors is the most important to consider when deciding to recommend a municipal bond unit investment trust to a client? A Age B Tax bracket C Ability to tolerate risk D Amount in retirement accounts

B Tax bracket The tax advantages of municipal bonds are most important to clients in higher tax brackets. For clients in low tax brackets, a taxable investment is often more appropriate than a tax-exempt security

A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or another person at her firm must notify: A The Office of the Comptroller of the Currency B The Treasury Department C The SEC D FINRA

B The Treasury Department The Financial Crimes Enforcement Network (FinCEN) and OFAC are both a part of the Treasury Department.

A Form 4 must be filed: A Within two business days of becoming a director B Within two business days of the date on which a director buys or sells securities C Within 10 days of becoming a director D Within 10 days of the date on which a director buys or sells securities

B Within two business days of the date on which a director buys or sells securities Form 3 must be filed with the SEC within 10 days of the date on which a person becomes an insider.

Which of the following statements is NOT TRUE concerning a 403(b) plan? A A tax-exempt employer can establish the plan. B Employees of certain tax-exempt organizations are permitted to make pre-tax contributions. C Employees of certain tax-exempt organizations are permitted to claim a tax credit based on the amount of their contributions. D Employees of certain tax-exempt organizations are not taxed on the earnings until they withdraw funds from their accounts.

C Employees of certain tax-exempt organizations are permitted to claim a tax credit based on the amount of their contributions. Similar to 401(k) plans, the contributions can be made in pre-tax dollars up to certain limits and the earnings in the account are tax deferred. Employees cannot claim a tax credit on their contributions. A 403(b) is a type of retirement plan for employees of tax-exempt organizations (i.e., 501(c)(3) organizations), which include religious and charitable entities and also includes employees of public schools and colleges.

When describing accounts for customers, all of the following are TRUE, EXCEPT: A Social Security numbers are not required for non-United States residents B The Uniform Gifts to Minors Act does not provide for joint accounts C Joint account information will be reported for both Social Security numbers on Form 1099 D A notarized copy of a death certificate is acceptable documentation of a customer's passing

C Joint account information will be reported for both Social Security numbers on Form 1099 Joint account information is reported on one Social Security number.

If an investor is anticipating that a company will have very high earnings in the current year, which of the following types of preferred stock is the most suitable? A Non-cumulative B Cumulative C Participating D Convertible

C Participating Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these stockholders may receive more than the stated amount based on the profits of the issuing company. In contrast, the benefit of cumulative preferred stock is that, if the issuer intends to pay its common stockholders a cash dividend after having not paid dividends, it allows the owner to add up all of the unpaid dividends to a future payment. Cumulative preferred stock may be beneficial during a period in which the company is unable to pay the full dividend since the owner is able to accrue the missing payments. Convertible preferred can be converted into a fixed number of common shares of the same issuer and tends to perform better when the market price of the common stock is appreciating. Lastly, non-cumulative preferred stock is limited to simply paying its stated dividend.

Under industry rules, the final approval to open a new account is given by a(n): A Registered representative B Operations manager C Partner or principal D Supervisor

C Partner or principal Final approval must be given by a partner or principal of the firm. Not every supervisor is a principal and only a principal can approve a customer account.

A broker-dealer is NOT required to maintain a record of which of the following items? A The first research report issued after the firm managed an issuer's IPO B Instant messages C Red herrings D Order tickets

C Red herrings According to FINRA rules, all retail communications, institutional communications, research reports, and correspondence (including e-mail and instant messages) that are used by a member firm must be kept on file for a minimum of three years. SEC registration statements (i.e., Form S-1 or S-3), prospectuses (which includes red herrings or preliminary prospectuses), and other documents that are written by an issuer are not required to be kept on file by member firms.

Ms. Jones reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 10 rights plus $10.50 are required to subscribe to one new share of stock Fractional shares become whole shares The record date is Friday, October 17 JPMorgan Chase and Bank of America are the transfer agents Goldman Sachs and Morgan Stanley are the standby underwriters If Ms. Jones currently owns 87 shares of the preferred stock of the XYZ Corporation, how many additional shares can she subscribe to and at what cost? A 8.7 shares plus $91.35 B 9 shares plus $91.35 C 9 shares plus $94.50 D Preferred stockholders are not permitted to participate in a rights offering

D Preferred stockholders are not permitted to participate in a rights offering Preferred stockholders are not permitted to participate in a rights offering. Pre-emptive rights are only made available to common stockholders. By participating in rights offerings, common stockholders are able to maintain their percentage of ownership.

A client is reading a financial publication that contains an advertisement for a mutual fund. Under the "omitting prospectus regulations" of the Securities Act of 1933, which of the following statements is FALSE? A This advertisement can list past performance of the mutual fund. B This advertisement should disclose to investors that it is important to read the prospectus before investing. C This advertisement can be accompanied by an application to receive a prospectus. D This advertisement can be accompanied by an application to invest.

D This advertisement can be accompanied by an application to invest. According to the SEC Rule 482, an offer to sell securities can only be made through a prospectus. An application to receive a prospectus can be placed in the advertisement but not an application to invest.

An investor is considering whether to buy the common or preferred stock of XYZ Corporation. When comparing these two types of securities, which of the following statements are TRUE? I Preferred stock is more likely to receive a dividend than common stock II Common stock has more potential for capital appreciation than preferred stock III Preferred stockholders have greater control over the corporation compared to common stockholders IV Common stock is generally more liquid than preferred stock

I, II, and IV only Preferred stock, unlike common stock, generally does NOT have voting rights. Common stockholders, therefore, control the corporation through the board of directors. Common stock generally provides an opportunity for an investment to appreciate, whereas preferred shares are more likely to receive income in the form of a dividend.