Series 6, Progress Exam 1a and b

All of the following are TRUE about SIPC, EXCEPT: a. It is an agency of the U.S. government b. It protects customers in the event of a brokerage firm's bankruptcy c. Membership in SIPC is restricted to broker-dealers d. It is a nonprofit organization

A All of the items mentioned about SIPC are true except it is an agency of the U.S. government. SIPC can borrow from the U.S. government, but is not an agency of the U.S. government.

Which of the following information is required under anti-money laundering rules? I. The client's Social Security number II. The client's DOB III. The client's physical address IV. Supporting documentation a. I and II only b. II and IV only c. II, III, and IV only d. I, II, III, and IV

A Anti-money laundering rules require firms to verify the identity of clients for whom they are opening accounts. As a result firms must collect the client's name, date of birth, home or business street address, social security number and other supporting documentation.

Which of the following would be classified as a joint account? I. An account established under UGMA II. An account with third-party trading authority III. A spousal IRA IV. An account shared between two brothers a. IV only b. III and IV only c. I and III only d. I, II, III, and IV

A In a joint account, all participants are considered part owners of the account. This is not the case in choices (I), (II), or (III). The custodian of a UGMA account manages the account, but the minor is the owner of the securities. Likewise, a person with third-party trading authority can help manage the account, but is not an owner. All IRA accounts are individual accounts; there is no such thing as a joint IRA. A spousal account is owned by the spouse whose name is on the account, even if the other spouse earned the income that was contributed.

Under what conditions can mutual fund shares be used as collateral in a margin account? I. If the shares have been paid in full for at least 30 days II. If the shares were purchased through a dividend reinvestment plan III. If all the securities in the mutual fund's portfolio are considered marginable by the Federal Reserve Board a. I or II only b. I or III only c. II or III only d. I, II, or III

A Newly issued securities are usually not permitted as collateral in margin accounts. Since mutual fund shares are always considered new shares when purchased, this rule applies to them. However, the SEC will permit newly issued shares to be transferred to a margin account after they have been owned for 30 days. In addition, shares that have been purchased as part of a plan for the automatic reinvestment of dividends may be used as margin collateral immediately.

A registered representative hears that one of her clients has won the lottery. Which of the following statements is TRUE regarding the updating of the client's information? a. The RR should update the paperwork promptly after speaking with the client b. The RR should update the paperwork within two business days of discovery of the information c. The RR must update the information promptly d. Upon speaking with the client, the RR has two business days to update the account information

A SRO rules require a registered representative to update his client's financial information promptly whenever a client informs him of a change in his status. There is no specific time requirement, such as the ones mentioned in choices (b) and (d). The reason choice (a) is a better answer than choice (c) is simply that choice (c) does not mention that the RR has spoken with the client. Choice (a) has confirmation of the news from the client directly. That is why choice (a) is the MOST correct answer.

Pete and Danielle are a married couple in their 20s. They both have jobs that pay well and they have begun to think about investing for retirement. Which of the following portfolio allocations would be most appropriate for them? a. 10% bonds, 90% stock b. 100% common stocks c. 80% bonds, 10% common stocks, 10% money market d. 50% bonds, 50% common stocks

A To amass the assets they will need at retirement, Pete and Danielle should include common stocks in their portfolio. A portfolio that is predominately bonds [choice (c)] will not likely produce the required long-term returns. However, a portfolio that mixes stocks and bonds [choice (d)] is probably a better choice for the couple than one that is exclusively common stock [choice (b)]. However, given their long time horizon (they are still in their 20s), Pete and Danielle can probably tolerate additional investment risk. So they can place the majority of their savings into stocks to increase their potential return; choice (a) would be most appropriate given their goals and risk tolerance.

A registered representative working in the underwriting department of a broker-dealer obtains confidential information while performing due diligence on a new issue. Unknown to the broker-dealer, the representative mentions the information to a customer and the customer uses the information to sell the stock, thereby avoiding a loss. Which of the following is subject to sanctions under SEC insider trading rules? I. The customer II. The registered representative III. The broker-dealer a. I only b. I and II only c. I, II, and III d. None of the above, since no profit was earned

Answer: C Anyone using material, nonpublic information is subject to insider trading sanctions, regardless of the outcome of the transactions. Persons passing on inside information to be used by another are also subject to sanctions. Broker-dealers are liable for insider trading violations of the persons they control and therefore they must institute procedures to detect and prevent the use of inside information.

When opening an account, a customer supplies the RR with basic information necessary to open the account, but refuses to provide the representative with financial or tax information. This would limit the RR's ability to: a. Accept unsolicited orders from the client b. Provide prospectuses to the client upon request c. Accept a third-party trading authorization naming the client's spouse d. Make recommendations to the client

Answer: D Explaination: RR's who make recommendations to customers must have reasonable grounds for believing that their suggestions are suitable, based on the client's financial situation, tax status, investment objectives, and any other relevant information collected. If the RR has no such information, justifying any recommendation will be difficult.

2. In reviewing and analyzing a customer's financial status, which of the following are important considerations? I. Discretionary income available for investment II. Insurance needs or policies in place III. Participation in retirement plans IV. Anticipated expenditures a. I and II only b. II and III only c. II, III, and IV only d. I, II, III, and IV

Answer: D Explanation: All of the information presented should be considered before suggesting or implementing an investment plan for a customer.

The factors that help determine a client's risk tolerance include: I. Income II. Age III. Personality IV. Net worth a. I only b. I and II only c. I, II, and III only d. I, II, III, and IV

Answer: D Explanation: Incorrect. A person's risk tolerance is affected by all of these factors—income, net worth, age, and personality type—as well as a number of other traits. For instance, family considerations such as having a number of dependents, might also influence a person's tolerance for risk.

Tim and Brenda are a married couple in their late 40s. They both have jobs that pay well and they have begun to think about investing for retirement. Which of the following portfolio allocations would be most appropriate for them? a. 100% bonds b. 100% common stocks c. 80% bonds, 20% common stocks d. 50% bonds, 50% common stocks

Answer: D Explanation: To amass the assets they will need at retirement, Tim and Brenda should include common stocks in their portfolio. A portfolio that is predominately bonds [choices (a) and (c)] will not likely produce the required long-term returns. However, a portfolio that mixes stocks and bonds [choice (d)] is probably a better choice for the couple than one that is exclusively common stock [choice (b)], for a couple of reasons. First, their time horizon is shorter than someone who starts a retirement portfolio in their 20s, so 100% common stock may be too volatile for their needs. In addition, asset allocation theories show that a portfolio diversified among asset classes will usually have a better risk/reward trade-off than a portfolio that contains only one asset class.

According to industry rules, which of the following must be obtained when an RR opens an account in which mutual fund shares will be purchased? a. The customer's date of birth b. Whether the customer is subject to IRS backup withholding rules c. Written acknowledgment that the customer has received the fund's prospectus d. The name of the RR opening the account and the signature of the manager who approved it

Answer: D Under industry rules, the following items MUST be obtained when opening an account. 1. The customer's name and residence 2. Whether the customer is of legal age (however, the customer's birth date is not required) 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepts the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity

An investment banker would do all of the following, EXCEPT: a. Attend due diligence meetings b. Print and transfer securities c. Forward a prospectus to purchasers of new issues d. Negotiate the public offering price with the issuer

B Investment bankers do not print and transfer securities. The transfer agent performs these functions. Investment bankers primarily set the price for a new issue and then market that issue to the public.

Which of the following is covered by the time-of-day restrictions of the rules regarding telephone solicitations? a. An RR calling a customer to clarify the instructions on a previous order b. An RR calling a prospective customer about a new mutual fund being offered by the rep's firm c. A back-office assistant receiving a call from a customer regarding the client's account d. An RR receiving a call from a prospective customer responding to a phone number in an advertisement for the broker-dealer

B Telephone solicitations may only take place between 8:00 a.m. and 9:00 p.m. local time of the party called, unless that person has given prior consent. The key word is solicitation, which typically refers to outgoing calls by RRs attempting to induce customers to buy or sell securities. Exceptions include calls by RRs to an existing customer to service or maintain the account.

All of the following are related to the Securities Exchange Act of 1934, EXCEPT: a. Creation of the SEC b. Primary market activities c. Insider trading regulations d. Manipulative trading practices

B The Securities Exchange Act of 1934 created the SEC and regulated activities in the secondary market. The Securities Act of 1933 required registration of securities and focused on primary market activities.

If a member firm wishes to open an account for an employee of another member firm, the firm that will be carrying the account must: I. Inform the employee that his employer will be notified II. Obtain permission from the employer III. Mail or deliver duplicate confirmations or statements to such employer if requested a. I and II only b. I and III only c. II and III only d. I, II, and III

B A member firm opening an account for an employee of another member firm must inform the employee that his employer will be notified. Duplicate confirmations must be sent to the employer if requested. Obtaining permission from the employer is not required under industry rules.

Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as: a. Equal and divided b. Equal and undivided c. Unequal and divided d. Unequal and undivided

B In a JTWROS account, each holder's interest is equal and undivided. Each position in the account is owned by both persons.

Whose Social Security number should appear on an account opened under the Uniform Gifts to Minors Act? a. Only the custodian's b. Only the minor's c. Both the custodian's and the minor's d. The parent's or legal guardian's

B Since the minor pays all taxes in an account formed under the Uniform Gifts to Minors Act, the minor's Social Security number should appear on the account.

The SEC has just declared the registration statement for the Iceberg Fund to be effective. What does this mean? a. The fund is an appropriate investment for the average investor b. The SEC has reviewed the registration statement and is allowing sales to commence c. RRs may describe the offering as being approved by the SEC d. The SEC has determined that the fund attains the objectives stated in the prospectus

B The SEC does not approve or pass on the accuracy of facts disclosed in a prospectus for a new issue of securities. The SEC reviews a prospectus to ensure that the proper facts about the issue have been disclosed. This will enable investors to make a prudent decision about buying the security. If the SEC believes the disclosure is inadequate, it will require the issuer to make changes. Once it no longer believes changes are necessary, it will declare the registration statement effective and allow sales to begin. The suitability of an investment for an individual must be based on that person's specific situation. Suitability cannot be inferred from the fact that the SEC has reviewed the registration statement and declared it effective.

A Suspicious Activity Report should be filed: a. Only in the event that the firm has actual knowledge that the client is laundering money b. For most types of suspicious activity depending on the facts and circumstances c. Only for transactions for more than $10,000 d. Only for transactions for parties on the OFAC list

B A Suspicious Activity Report (SAR) should be filed for most suspicious transactions depending on the facts and circumstances surrounding the transaction.

A private placement conducted under Regulation D may be sold to a maximum of: a. 15 nonaccredited investors b. 15 accredited investors c. 35 nonaccredited investors d. 35 accredited investors

C A Reg D offering may be sold to a maximum of 35 nonaccredited investors. There is no limit to the number of accredited investors. An individual is classified as an accredited investor if he has a net worth of $1,000,000 or has had income of $200,000 for the previous two years and anticipates that his earnings will continue at the same level.

Which of the following persons is required to register as an investment adviser? a. A broker-dealer giving investment advice to a client as part of its regular service b. A broker publishing a market letter c. A brokerage firm acting as a financial planner for its clients and charging a fee for this service d. A bank trust officer

C A broker-dealer is required to register as an investment adviser if it charges a separate fee for providing financial planning or advisory services to its clients.

Which of the following individuals is required to register as an investment adviser? a. A broker giving investment advice to a client as part of her regular duties b. A broker publishing a market letter c. A broker acting as a financial planner for her clients and charging a fee for this service d. A bank trust officer

C Brokers are required to register as investment advisers if they charge a separate fee for providing financial planning or advisory services to clients.

Cash trades must be paid for and delivered on: a. The third business day after the transaction b. The fifth business day after the transaction c. The same day as the transaction d. The next business day after the transaction

C Cash trades, as distinguished from trades that are simply executed in a cash account, must be paid for and delivered on the same day as the transaction.

A corporation has filed a registration statement with the SEC. The underwriters, before the effective date, can: I. Send a preliminary prospectus (red herring) to potential investors II. Send a research report to potential investors III. Publish a tombstone ad a. III only b. I and II only c. I and III only d. I, II, and III

C During the period after filing but before the effective date (the waiting or cooling-off period), underwriters may offer the securities to customers by means of the preliminary prospectus (red herring). However, they may not complete a sale before the effective date. Advertising, including research reports, cannot be sent to potential investors when an issue is in registration. One exception is a tombstone ad. Tombstones can be published during the cooling-off period.

Which of the following may NOT occur during the waiting period of the securities registration process? a. The underwriter publishes a tombstone ad b. An underwriter sends a red herring to a potential customer c. An RR accepts a cash deposit for the offering from an interested customer d. An RR discusses the offering with a customer over the phone

C During the waiting period (cooling-off-period), RRs may send customers the preliminary prospectus (red herring), discuss the issue with them, and accept (nonbinding) indications of interest. However, no part of the purchase price can be accepted until on or after the effective date.

Federal and state registration requirements apply to all of the following, EXCEPT: a. Publicly traded limited partnerships b. Preferred stock c. Municipal securities d. Open-end investment companies

C Municipal and U.S. government securities are exempt from the registration requirements of the Securities Act of 1933 and from state registration requirements.

The use of a prospectus in selling a security relieves a salesperson from the responsibility to disclose to a customer: a. The risks associated with investing b. Negative financial information about the company c. Neither (a) nor (b) d. Both (a) and (b)

C Sales for new issues of securities may only be solicited through the use of a prospectus. The prospectus will present investors with all of the pertinent facts needed on which to base investment decisions. The use of a prospectus does not relieve a salesperson from disclosing negative aspects about the issue to prospective purchasers.

Under the Telephone Consumer Protection Act (TCPA) of 1991, what are the acceptable hours of operation for an information helpline? a. 9:00 a.m. to 5:00 p.m. b. 8:00 a.m. to 9:00 p.m. c. 24 hours a day, 7 days a week d. 8:00 a.m. to 9:00 p.m. Monday through Friday and 9:00 a.m. to 5:00 p.m. on weekends

C The Telephone Consumer Protection Act deals with cold calling procedures. This Act is concerned with the activities of telemarketers and places restrictions on the hours for outbound calls a firm may make to prospects (8:00 a.m. to 9:00 p.m. the client's time). There is no restriction for inbound calls placed to the firm by prospects and/or existing clients. These inbound calling lines may be open around the clock, 7 days a week.

A registered representative is selling private placement variable life insurance policies to accredited investors. Individuals must meet which TWO of the following standards to be classified as accredited investors? I. $200,000 net worth II. $1,000,000 net worth III. $200,000 annual income IV. $300,000 annual income a. I or III b. I or IV c. II or III d. II or IV

C To qualify as an accredited investor an individual must have a net worth of $1,000,000 or an annual income of $200,000 with the expectation that the income will continue at that level.

Which of the following is legal price manipulation? a. Fully disclosed pump priming b. Regulated matched orders c. Client approved front running d. Stabilization

C To qualify as an accredited investor an individual must have a net worth of $1,000,000 or an annual income of $200,000 with the expectation that the income will continue at that level. D Stabilization involves pegging or fixing the bid price of a new issue. This is used to support its price in the secondary market and typically ends when the underwriting period ceases. Pump priming is a means of injecting money into the economy as an incentive to increase consumer spending. Regulated matched orders involve trading between two brokers at the same price. Client approved front running allows another client to trade ahead of that client's order.

The SEC, under the Securities Act of 1933, does all of the following, EXCEPT: a. Regulates IPOs b. Regulates mutual funds c. Regulates private placements d. Regulates primary distributions

C Under the Securities Act of 1933 the SEC regulates primary distributions, which includes initial public offers (IPOs), variable products, mutual funds, etc. Private placements are generally unregistered offerings not subject to '33 Act provisions.

When a broker-dealer is acting in the capacity of a dealer, the firm is acting as: a. An agent b. An intermediary c. A principal d. A broker

C When a broker-dealer (brokerage firm) is acting in the capacity of a dealer, the firm is acting as a principal. A dealer buys and sells for its own account and risk. A broker, who is an agent or intermediary for the customer, does not assume the risks of ownership as a dealer and receives a commission. A broker-dealer can choose in which capacity it wishes to act in a transaction but cannot act as both a broker and a dealer in the same transaction.

An RR comes to your firm and wants to open an account for herself and her husband. What actions must be taken? I. Explain to the RR that this action is prohibited under FINRA rules and deny the request II. Obtain permission from the RR's employer III. Mail or deliver duplicate confirmations or statements to such employer if requested a. I only b. II only c. III only d. II and III only

C When opening an account for an employee of another firm the broker/dealer is required to notify the employee's firm and send duplicate confirmations and statements if requested by the employer. These accounts are not prohibited and employer permission is not required.

A broker-dealer must give a description of its policies regarding client privacy to: a. Any person who makes a written request b. All consumers at the time they first transact business with the firm c. All customers at the time they first establish a relationship with the firm d. All non-affiliated third parties that have access to non-public client information

C Regulation S-P separates clients into two categories—customers and consumers. A customer is a person who has a continuing relationship with the firm, while a consumer is a person who is the process of potentially becoming a customer. Firms must furnish all of their customers with a notice regarding their privacy policies at the time the relationship with the firm is first established.

Which of the following statements is TRUE regarding the role of SIPC? a. SIPC provides protection against employee theft b. SIPC covers separate accounts c. SIPC covers separate customers d. All regulated investment companies must obtain SIPC coverage

C SIPC covers separate customers of a broker-dealer. An individual would be viewed as a separate customer. An individual who holds a personal account and an IRA would be treated as two separate customers.

Under the Uniform Gifts to Minors Act, which of the following statements is TRUE? a. The custodian has title to any stocks in the trust b. Any income or capital gains will not be taxed as long as the funds are used for higher education c. The account may hold some speculative positions d. The account is jointly owned by the child and custodian

C The investments made in an UGMA/UTMA are subject to the standards of prudence found under the UPIA (Uniform Prudent Investor ACT). This applies to the entire portfolio, not individual investments. In other words, speculative investments can be balanced with conservative investments. The custodian does not hold title to the investments, nor is the account a joint account. The assets do not need to be used for education expenses.

Under the Investment Company Act of 1940, mutual fund sales literature containing performance data would be considered misleading if it did not also contain: a. A money-back guarantee b. A provision for a 45-day free-look period c. The same yield or total return data required in an omitting prospectus d. The most recent list of the securities held in the fund's portfolio

C Under the Investment Company Act of 1940, any investment company sales literature containing performance data also must contain the SEC mandated yield or total return information required in an omitting prospectus.

A prime objective of the Investment Company Act of 1940 is to: a. Ensure that practices on stock exchanges are similar throughout the country b. Control the OTC market and prevent another market crash c. Ensure that individual investors are provided with full and fair disclosure regarding the risks of securities d. Ensure that individuals who invest in investment company securities are fully informed and fairly treated

D A prime objective of the Investment Company Act of 1940 is to ensure that any persons planning to invest in investment company shares are fully informed of the risks that are associated with these securities. Investors must also be informed of their rights as shareholders and the powers of the board of directors. All of this information must be contained in the prospectus for the fund.

An aggressive growth portfolio would be suitable for an investor: a. With low-risk tolerance b. With a large amount of capital that must be kept fairly liquid c. Whose only investment experience lies with fixed annuities d. Who is financially secure, has a high income level, and has a high tolerance for risk

D An aggressive growth portfolio is invested in growth companies that pay little income but have a great potential for capital appreciation. However, due to the emphasis on capital gains, aggressive growth funds carry a great deal of risk. Financially secure investors are most appropriate for these investments and are best able to absorb the risk of this type of portfolio.

Which of the following persons is permitted to purchase an equity IPO? a. A cousin supported by a registered representative b. The spouse of a registered representative c. An accountant who is involved with the offering d. An aunt not supported by a registered representative

D An equity IPO may not be purchased by restricted persons, including: • Member firms and any associated person (i.e., an employee) of the member firm • An immediate family member of an employee of a member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other persons who are materially supported by an employee of a member firm. The aforementioned immediate family members would only be considered restricted persons if any one of the following three conditions applies. • The employee gives/receives material support to/from the immediate family member. Material support is defined as providing more than 25% of the person's income, or living in the same household as the person associated with the member firm. • The family member is employed by the member firm that is selling the new issue. • The family member has the ability to control the allocation of the new issue. The definition of a restricted person also includes finders and fiduciaries (such as attorneys and accountants) involved in the new issue and portfolio managers, who buy and sell securities on behalf of institutional investors. Although an aunt or cousin is not normally considered an immediate family member, the cousin in choice (a) is supported by the registered representative, which makes him a restricted person. Since the aunt in choice (d) is not supported by the registered representative, she is not defined as a restricted person and is permitted to purchase an equity IPO.

Which of the following would probably be subject to the registration requirements of the Investment Advisers Act of 1940? a. The author of a business periodical b. A bank c. A broker-dealer d. A financial planner

D Authors of business periodicals, banks, and broker-dealers are specifically exempted from the registration requirements of the Investment Advisers Act of 1940. A financial planner receives a fee for providing financial advice and must therefore be registered.

Functions of the investment adviser include: I. Providing and analyzing research on financial and economic trends II. Appointing the officers of the fund III. Timing investment decisions to take advantage of industrial trends or broad economic changes IV. Implementing the appropriate diversification of the fund's portfolio a. I and II only b. I and III only c. I, II, and III only d. I, III, and IV only

D Investment advisers are responsible for implementing a strategy that attempts to meet the fund's objectives in accordance with its fundamental investment policies. The board of directors appoints officers of the fund.

Which of the following securities would be subject to federal securities registration requirements? a. Securities offered through a private placement b. GNMA securities c. General obligation bonds d. Mutual fund shares

D Mutual fund shares would be subject to registration requirements at the state and federal level. The other securities are exempt from federal and state registration requirements. GNMA securities (U.S. government agency securities) and general obligation bonds (municipal securities) are exempt securities. Private placements are exempt offerings.

Which of the following securities would be subject to federal securities registration requirements? a. Securities offered through a private placement b. GNMA securities c. General obligation bonds d. Mutual fund shares

D Mutual fund shares would be subject to registration requirements at the state and federal level. The other securities are exempt from federal and state registration requirements. GNMA securities (U.S. government agency securities) and general obligation bonds (municipal securities) are exempt securities. Private placements are exempt offerings.

A tombstone advertisement for an investment company, published under SEC Rule 134, may contain which of the following? I. The current yield of the fund II. A description of the objectives and investment strategy of the fund III. The fund's most recent NAV IV. Information about how a prospectus can be obtained a. II only b. I and IV only c. I, III, and IV only d. II, III, and IV only

D Tombstone ads may not contain performance figures, although the fund's most recent NAV may be given

9. Which of the following would be considered a fiduciary? I. A trustee II. A guardian III. An administrator of an estate IV. An executor of an estate a. I only b. I and II only c. I, II, and III only d. I, II, III, and IV

D A fiduciary is an individual or organization acting in a position of trust. All of the choices mentioned would be considered fiduciaries.

When analyzing an individual's financial status to determine suitable investments, all of the following would be important considerations, EXCEPT? a. Whether the individual has adequate insurance coverage b. Whether there is discretionary income available for investments c. Are there any anticipated expenditures d. What is the future earnings opportunities for the individual

D Future earnings opportunities do not determine the current suitability of investments. Suitability is based on the individual's situation at the time an investment is being made. An individual should have adequate insurance coverage and discretionary income to make the investment, as well as the ability to cover any anticipated expenditures

The SEC, under the Securities Act of 1933, performs all of the following, EXCEPT: a. Review prospectuses b. Regulate the issuance of new securities c. Regulate securities offerings d. Approve or disapprove new issues

D The SEC performs all of the items mentioned in the question, except approve or disapprove new issues or pass on the investment merits of new issues. The SEC reviews the information contained in the prospectus to see that it is adequate but it does not say that it is true. In addition, only the investor can judge whether a new issue has investment merit—whether it is a good or bad investment for that individual.

When handling a discretionary account, a FINRA member must: a. Obtain a written power of attorney from the customer b. See that transactions are suitable and not excessive c. Approve promptly, in writing, all discretionary orders d. All of the above

D When handling a discretionary account, the FINRA member must complete all the steps mentioned in the question.