Section 1 All Parts B
Q: A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following? A. A Carrying Firm B. A Depository Trust C. An Investment Company D. A Fully Disclosed Introducing Firm
Answer: A. A Carrying Firm Explanation: Most firms choose to "introduce" their customers to another member firm known as a clearing or carrying firm to handle back office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities. Reference: 1.1.4 in the License Exam Manual
Q: All of the following are associated with being a carrying firm EXCEPT: A. Being a fully disclosed firm B. Accepting customer securities C. Being able to clear customer transactions D. Accepting customer funds
Answer: A. Being a fully disclosed firm Explanation: A carrying firm has the capability to do trade executions, clear and settle transactions, and take custody of customer funds and securities. A fully disclosed firm is one that introduces its customer business to another firm for the purpose of clearing and settling transactions. Reference: 1.1.4 in the License Exam Manual
Q: All of the following SROs function under the SEC's oversight EXCEPT: A. FSLIC (Federal Savings & Loan Corporation) B. FINRA (Financial Industry Regulatory Authority) C. CBOE (Chicago Board Options Exchange) D. MSRB (Municipal Securities Rulemaking Board)
Answer: A. FSLIC (Federal Savings & Loan Corporation) Explanation: Self-regulatory organizations (SROs) function under the SEC's oversight. Each SRO is accountable to the Commission for enforcing federal securities laws, as well as supervising securities practices within an assigned jurisdiction. These include FINRA, MSRB, and the CBOE. Reference: 1.1.2 in the License Exam Manual
Q: Each SRO functions under the SEC's oversight and is accountable to the commission for enforcing federal securities laws. While the MSRB regulates all matters related to the underwriting and trading of state and municipal securities, it does not have enforcement powers of its rules. Which of the following does the MSRB rely on for enforcement of these rules? A. Financial Industry Regulatory Authority (FINRA) B. Chicago Board Options Exchange (CBOE) C. Securities & Exchange Commission (SEC) D. Federal Deposit Insurance Corporation (FDIC)
Answer: A. Financial Industry Regulatory Authority (FINRA) Explanation: The MSRB regulates all matters related to the underwriting and trading of state and municipal securities but does not have enforcement powers. It depends on other SROs (e.g., FINRA) for the enforcement of its rules. Reference: 1.1.2 in the License Exam Manual
Q: Anyone who, as part of their business, gives investment advice for compensation must register as a(n): A. Investment adviser under the Investment Advisers Act of 1940 B. Agent for the Issuer C. Stock Broker D. Underwriter
Answer: A. Investment adviser under the Investment Advisers Act of 1940 Explanation: Broker-dealers who provide advice for a fee are subject to registration under this 1940 IA Act. Agents of investment advisers must register and pass a qualification examination. Reference: 1.1.4 in the License Exam Manual
Q: An institutional investor selects a single FINRA/NYSE member firm to provide for financing and custody of securities, while orders to buy or sell are placed with executing brokers. This is an example of a(n): A. Prime Brokerage Account B. Managed Account C. Investment Advisory Account D. Omnibus Clearing Arrangement
Answer: A. Prime Brokerage Account Explanation: A prime brokerage account is one in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers. Reference: 1.1.4 in the License Exam Manual
Q: An individual who purchases securities for a personal account is called a(n): A. Retail Investor B. Institutional Investor C. Accredited Investor D. Market Maker
Answer: A. Retail Investor Explanation: An individual who makes investments such as the purchase of securities for his or her account rather than for an organization is a retail investor. This investor may be accredited, but there is no way to know for sure given the limited information. Reference: 1.1.4 in the License Exam Manual
Q: Broker-dealers who transact securities business with other BDs or customers must be registered with? A. SEC (Securities Exchange Commission) B. FRB (Federal Reserve Board) C. OCC (Options Clearing Corporation) D. FINRA (Financial Industry Regulatory Authority)
Answer: A. SEC (Securities Exchange Commission) Explanation: Any entity such as a broker-dealer intending to do business with other BDs or customers involving securities must be registered with the Securities and Exchange Commission (SEC). Reference: 1.1.1 in the License Exam Manual
Q: Broker-dealers must comply with SEC rules and regulations when conducting business. A broker-dealer that does not comply may be subject to all of the following EXCEPT: A. Censure B. A Prison sentence for principals of the firm ranging from 2-5 years C. Fines D. Suspension or revocation of its registration
Answer: B. A Prison sentence for principals of the firm ranging from 2-5 years Explanation: Broker-dealers must comply with SEC rules and regulations when conducting business. A broker-dealer that does not comply is subject to censure, limits on activities, functions, operations, suspension of its registration (or one of its associated person's license to do business), revocation of registration, and/or fines. Reference: 1.1.1 in the License Exam Manual
Q: A broker-dealer's business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer's transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm? A. Full Service B. Introducing/Fully Disclosed C. Clearing Agent/Carrying Agent D. Market Making
Answer: B. Introducing/Fully Disclosed Explanation: A fully disclosed "introducing" broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. Reference: 1.1.4 in the License Exam Manual
Q: An investor opens an account with BNZ Government Securities, a broker-dealer limiting its transactions exclusively to securities issued by the U.S. government. The account holds $250,000 of Treasury bonds, $250,000 of Treasury notes, and $50,000 in cash. If BNZ's broker-dealer business should fail, the investor would receive SIPC protection in the amount of: A. All of the securities & all of the cash, because U.S. Gov't Securities do not go bankrupt B. $50,000 of the cash & $450,000 of the securities C. $0.00 D. $500,000 of the securities, none of the cash
Answer: C. $0.00 Explanation: Although the vast majority of broker-dealers are required to be members of SIPC, those who deal exclusively in U.S. government securities are exempt. Reference: 1.1.3 in the License Exam Manual
Q: Which of the following organizations was created to protect investors financially from a bank failure? A. FRB (Federal Reserve Board) B. SIPC (Securities Investment Protection Corporation) C. FDIC (Federal Deposit Insurance Corporation) D. OFAC (Office of Foreign Assets Control)
Answer: C. FDIC (Federal Deposit Insurance Corporation) Explanation: The FDIC provides deposit insurance guaranteeing the safety of a depositor's accounts in member banks up to $250,000 for each deposit ownership category in each insured bank. Reference: 1.1.3 in the License Exam Manual
Q: Which of the following organizations looks to promote self-discipline among members and investigate and resolve grievances between the public and members and between members? A. SIPC (Securities Investor Protection Corporation) B. SEC (Securities Exchange Commission) C. FINRA (Financial Industry Regulatory Authority) D. MSRB (Municipal Securities Rulemaking Board)
Answer: C. FINRA (Financial Industry Regulatory Authority) Explanation: Financial Industry Regulatory Authority (FINRA) regulates all matters related to investment banking, trading in the OTC markets and some exchange markets, and the conduct of FINRA member firms and associated persons including the promotion of self-discipline among members. It also investigates and looks to resolve grievances between the public and members and between members. The MSRB relies upon FINRA to perform dispute resolution. Reference: 1.1.2 in the License Exam Manual
Q. Which of the following regulatory bodies regulates but has no enforcement powers? A. SEC (Securities Exchange Commission) B. FINRA (Financial Industry Regulatory Authority) C. MSRB (Municipal Securities Rulemaking Board) D. CBOE (Chicago Board Options Exchange)
Answer: C. MSRB (Municipal Securities Rulemaking Board) Explanation: The MSRB regulates all matters related to the underwriting and trading of state and municipal securities. While they have the authority to write the MSRB rules and regulations they have no enforcement powers. Reference: 1.1.2 in the License Exam Manual
Q: Broker-dealers and registered representatives may be subject to each of the following administrative and regulatory bodies EXCEPT? A. State Securities Administrator B. NYSE (New York Stock Exchange) C. SIPC (Securities Investment Protection Corporation) D. FINRA (Financial Industry Regulatory Authority)
Answer: C. SIPC (Securities Investment Protection Corporation) Explanation: Depending on their lines of business, broker-dealers are subject to a variety of regulatory bodies, such as FINRA, the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE), state administrators, and others. Those broker-dealers that have a municipal securities line of business must comply with MSRB rules which are enforced by FINRA. However, SIPC is not a regulatory body; rather it provides insurance protection for investors of failed broker-dealers. Reference: 1.1.3 in the License Exam Manual
Q: All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities EXCEPT: A. the Depository Trust Company B. Carrying Firms C. the National Securities Clearing Corporation D. Credit Unions
Answer: D. Credit Unions Explanation: Credit unions cannot serve as a depository or clearing facility for securities transactions. Reference: 1.1.4 in the License Exam Manual
Q: A firm designated as self-clearing can: I.act in a back-office capacity for an introducing firm II.not act in a back-office capacity for an introducing firm III.clear and settle transactions executed by other firms IV.only clear transactions it executed A. II & IV B. II & III C. I & IV D. I & III
Answer: D. I & III Explanation: Self-clearing firms not only clear and settle their own executions (transactions) but can clear the executions of other firms that would be considered introducing or fully disclosed firms. In this light, fully disclosed firms are those that "introduce" their business to clearing firms. Clearing and settling transactions includes providing any back-office functions needed. Reference: 1.1.4 in the License Exam Manual
Q: A fully disclosed broker-dealer: A. Is also known as a full-service clearing agent able to process & clear transactions B. Is like a clearing agent in that it can take custody of funds & securities C. Clears all of its retail customer transactions & those of other BDS D. Is one that introduces its business to a carry firm to clear transactions
Answer: D. Is one that introduces its business to a carry firm to clear transactions Explanation: A fully disclosed broker-dealer is also known as an introducing BD because it introduces its business to a carrying firm that can clear and process transactions for it. Unable to clear transactions themselves, they are not a clearing agent or carrying firm and therefore cannot take custody of funds and securities. Reference: 1.1.4 in the License Exam Manual
Q: A registered securities broker-dealer that does not comply with FINRA and SEC(Securities Exchange Commission) rules and regulations is subject to each of the following sanctions EXCEPT: A. Partial or full suspension of its registration B. Limits on activities, functions, or operations B. Censure D. Reductions in SIPC Coverage
Answer: D. Reductions in SIPC Coverage * SIPC = Securities Investor Protection Corporation * Explanation: Broker-dealers that do not comply with SEC and FINRA rules and regulations are subject to censure, limits on activities, functions, or operations, suspension of its registration, revocation of registration, fines and more. Reference: 1.1.1 in the License Exam Manual
Q: While the MSRB writes the rules and regulations regarding underwriting and trading for municipal securities, it does not enforce those rules. Who does? A. NYSE (New York Stock Exchange) B. FINRA (Financial Industry Regulatory Authority) C. SEC (Securities Exchange Commission) D. OCC (Options Clearing Corporation)
Q: While the MSRB writes the rules and regulations regarding underwriting and trading for municipal securities, it does not enforce those rules. Who does? Answer: B. FINRA (Financial Industry Regulatory Authority) Explanation: While the MSRB has rulemaking authority, it has no authority to enforce those rules. The enforcement of the MSRB rules on broker-dealers has been primarily delegated to FINRA. Bank regulatory agencies, such as the FRB, enforce the MSRB rules on banks who act as municipal dealers. Reference: 1.1.2 in the License Exam Manual