Series 7 part 3
A member firm may commingle the securities of two or more customers A) with the customers' written permission. B) under no circumstances. C) with the SEC's written permission. D) with FINRA's written permission.
A Explanation A member may commingle a customer's securities with those of other customers only if all of the customers involved have given their written consent.
A designated market maker is permitted to do all of the following except A) accept a not-held order. B) buy and sell for a proprietary account. C) accept a limit order. D) represent a bid and offer simultaneously.
A Explanation A specialist (designated market maker) on the floor does not deal directly with the public. Therefore, a designated market maker cannot accept any order that requires the exercise of discretion. A not-held order is one in which the floor broker can choose the price or time of execution.
An investor wishes to purchase a new issue municipal bond. Which of the following terms describe the form of the bond? Bearer Registered as to principal only Fully registered Book entry A) III and IV B) II and IV C) I and II D) I and III
A Explanation All new municipal bonds are issued either in fully registered or book entry form.
New issues of municipal securities are available in which of the following forms? Bearer Book entry Registered Registered as to principal only A) II and III B) I and IV C) II and IV D) I and III
A Explanation Although municipal bonds used to be issued in bearer form, this is no longer permitted. The same is true of bonds registered as to principal only. Newly issued bonds can either be fully registered or book entry, which is a certificateless form of ownership.
A representative enters a customer's immediate-or-cancel (IOC) order to sell 1,000 shares at $12. If only 500 shares can be sold at $12, which of the following will occur? A) The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted. B) Because the entire order cannot be filled, the entire order will be canceled unexecuted. C) Because 500 shares can be sold, the balance of the order will remain as a sell limit order for 500 shares at $12. D) None of these.
A Explanation An IOC order will take a partial fill. Time is the limiting factor in an IOC.
Sell order tickets must be A) marked as either long or short. B) executed in accordance with the appropriate rules but not necessarily marked. C) marked only if they are short sales. D) marked only if they are long sales.
A Explanation Every sell order must be marked as either long or short.
If an individual fails a FINRA qualification exam three consecutive times, a fourth attempt may not be made for A) 180 days. B) 90 days. C) 30 days. D) 60 days.
A Explanation If a qualification exam is failed three consecutive times, a fourth attempt may not be made for 180 days.
Traders can sell short when a stock ticks up. when a stock ticks down. unrestrictedly in both exchange and over-the-counter (OTC) markets. A) I, II, and III B) II and III C) I and III D) I and II
A Explanation In both exchange and OTC markets, traders can sell short at any time in the trade sequence.
Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date? A) 600 shares at $45.45 B) 660 shares at $46.37 C) 600 shares at $50 D) 660 shares at $46.50
A Explanation In this example, adjust only the share price: $50 ÷ (1 + 0.10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares).
A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account? A) $1,000 B) $15,000 C) $2,000 D) $0
A Explanation In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.
A client sends a text message to the registered representative handling the account. The message contains a complaint about alleged mishandling of the account. One day later, the client sends another text message, but this one rescinds the complaint. Which of the following best describes the action to be taken? A) Report the complaint to your manager/supervisor. B) Thank the client for rescinding the complaint, and because it was not in writing, a report need not be made. C) Ignore the incident because the complaint was not in writing. D) Ignore the incident because the complaint was rescinded.
A Explanation It is important to note that complaints delivered electronically (text, email, IM, etc.) are considered written complaints. Even when the complaint is rescinded, a registered representative must report it to the appropriate supervisory person. That individual will then enter the complaint and its disposition into the company's complaint file.
Member firms must keep records on customer complaints for A) 4 years. B) 3 years. C) 6 years. D) 5 years.
A Explanation Member firms must keep the records on customer complaints for at least 4 years.
If an investor has an established margin account with a short market value of $24,000 and a credit balance of $30,000, the maintenance call will be for A) $1,200. B) $2,000. C) $6,000. D) $7,200.
A Explanation Minimum maintenance requirement in a short margin account is 30% of the current market value. In this case, 30% of $24,000 is $7,200. The equity in the account is currently $6,000 ($30,000 − $24,000). Therefore, the amount of the maintenance call is $1,200.
Government agency securities settle A) the second business day following the trade date. B) in three business days following the trade date. C) the seventh calendar day following the trade date. D) the next business day following the trade date.
A Explanation Most government agencies are treated as a corporate issue. Trades of corporate securities settle regular way (in two business days).
Your customer's margin account currently has SMA of $7,000. When asked for an explanation of what that means, you could respond that A) the account has buying power equal to 200% of the SMA. B) this is just another way of stating the equity in the account. C) the SMA will increase when the market value of short positions in the account increases. D) the account has borrowing power of 2:1.
A Explanation SMA is simply a line of credit. That is, the customer can withdraw the SMA and use it as desired. If the customer wishes to purchase securities, that SMA ($7,000 in our case) can be used to meet an initial margin call. With $7,000, one can buy $14,000 of stock. That is buying power equal to 200% (twice) of the SMA. Because SMA is a line of credit, when there is $7,000 of SMA, that is what the customer may borrow. That is a 1:1 ratio, not a 2:1. Had the choice said, "the account has buying power of 2:1," it would mean the same as the correct choice of 200%. SMA increases in a short account when the short market value decreases. Remember, short sellers are bearish. SMA and account equity are not synonymous terms and are generally different amounts.
Which of the following statements regarding the Code of Arbitration Procedure is true? A) Simplified arbitration is available for claims of $50,000 or less, and the statute of limitations is six years from the triggering event. B) Simplified arbitration is available for claims of $25,000 or less, and the statute of limitations is three years from the triggering event. C) Simplified arbitration is available for claims of $25,000 or less, and the statute of limitations is six years from the triggering event. D) Simplified arbitration is available for claims of $50,000 or less, and the statute of limitations is three years from the triggering event.
A Explanation Simplified arbitration is available for claims of $50,000 or less. The statute of limitations for filing a claim is six years from the event giving rise to the claim.
The locate requirement of Regulation SHO for short sales does not apply to A) nonconvertible bonds traded on the NYSE. B) over-the-counter equity securities. C) American depositary receipts traded on the Nasdaq Stock Market. D) preferred stock traded on the NYSE.
A Explanation The locate requirement is applicable to all short sales of equity securities. It is unlikely to be tested, but, just in case, for purposes of this rule, convertible bonds are considered equity securities.
Which of the following will not affect special memorandum account (SMA)? A) A stock dividend on stock held long in the account B) A long sale at a profit C) A deposit of cash into the account by the customer D) A cash dividend on stock held long in the account
A Explanation The value of the stock dividend received will be offset by the decline in current market value (CMV) of the long position on which the dividend is paid. The account's long CMV will not change; it will just be represented by more shares. There will be no change in the overall CMV, debit balance, or equity, and therefore no change in the SMA. On the other hand, a cash dividend means that new money is coming into the account, which will reduce the debit balance and be credited to SMA so the customer may withdraw the dividend, if desired.
An investor has an established margin account with a long market value of $6,500 and a debit balance of $3,750, with Regulation T at 50%. A maintenance call would be triggered if the long market value decreased below A) $5,000.00. B) $8,666.67. C) $4,875.00. D) $2,812.50.
A Explanation To determine long market value at maintenance, divide the debit balance of $3,750 by 75% ($5,000).
A broker-dealer informs a customer that her order was not executed because of stock ahead. The order was most likely A) a limit order. B) a short sale. C) a market order. D) a margin purchase.
A Explanation When there are a number of limit orders entered at the same price, they are filled in the order in which they have been received. It is possible that those orders received later could not be executed because the execution of the earlier orders has caused the market price to move away from the limit price. Market orders are always executed at the best price in the market (even though that might be far away from what the investor expected). If the investor wants immediate execution—turn in a market order. If the client wants a specific price—turn in a limit order but give the warning that it might never be executed.
If a registered representative is suspended by FINRA's Department of Enforcement, his first appeal would be to A) a federal court. B) the National Adjudicatory Council. C) the SIPC. D) the SEC.
B Explanation A registered representative may appeal decisions of the DOE to FINRA's National Adjudicatory Council. Appeals may then go to the SEC and finally to the federal appellate court system.
If a confirming broker-dealer receives a DK notice from the contra party to the trade, it means that the contra party A) does not know if it still wants the security on those terms. B) has no knowledge of the trade. C) does not know if its customer still wants the security on those terms. D) meant to say OK, but entered the wrong information.
B Explanation A DK (don't know) notice is used by member firms to inform the other side of the trade that it has no knowledge (no record of) the trade as reported. Every transaction has two parties—the contra party is the one on the opposite side of you. If your firm is the buyer, the contra party is the seller and vice versa.
If a customer with an unrealized gain on a short stock position wishes to protect her profit, she should enter A) a buy limit order. B) a buy stop order. C) a sell limit order. D) a sell stop order.
B Explanation A buy stop order can be placed above the current market to protect the short stock position. If the stock trades at or above the stop price, the order is elected and becomes a market order to buy the stock, which will be used to cover the short position.
To which of the following firms could a member grant concessions or other allowances? Another member firm A suspended member firm A foreign nonmember broker-dealer ineligible for FINRA membership A U.S. nonmember broker-dealer A) II and IV B) I and III C) I and II D) III and IV
B Explanation A member can grant discounts and other concessions only to other member firms. A suspended member must be treated like a member of the general public (no discounts or concessions). The only exception is that a member firm can grant concessions to a foreign nonmember firm that is ineligible for FINRA membership.
A fill-or-kill order (FOK) must be executed in its entirety. may be executed in part or in full. must be executed in one attempt. may be executed after several attempts. A) II and IV B) I and III C) I and IV D) II and III
B Explanation An FOK order is one where the firm handling the order can make one attempt to fill the order in its entirety. If unable to do so, the order is canceled.
All of the following would be considered a proper way for a client to file a complaint with a FINRA member firm except A) telegram. B) telephone. C) instant message. D) text.
B Explanation Complaints must be filed in writing. Telephone generically means an oral conversation (i.e., a telephone call). If that phone is used to send an email, text, or instant message, that is considered in writing.
One of your new customers indicates that he does not want the securities transferred into the name of the brokerage firm nor does he want the securities held in his name at the firm. At the same time, he wants to be able to make trades easily without delivery issues. What would you recommend? A) Use the transfer and ship option where the certificates are transferred into his name and then shipped to him B) The customer should use the DRS C) Open the account as a DVP/RVP account D) Have all securities kept in street name
B Explanation DRS stands for the Direct Registration System. DRS provides a book-entry service. The issuer keeps the records of ownership with no certificates issued. When there is a sale of securities in the account, the customer tells the DRS to deliver to the broker-dealer and there are no hassles with signature guarantees or mutilated certificates. Transfer and ship creates potential delivery issues because the customer will have to be sure to have everything in good deliverable form to the broker-dealer by T+2. DVP and RVP are for institutions and street name means in the name of the brokerage firm, something the customer specifically does not want. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
Establishing short positions is typical for all of the following except A) listed stock. B) municipal bonds. C) over-the-counter common stock. D) preferred stock.
B Explanation Even though there is no regulation that prohibits short sales of municipal bonds, this is rarely done. To short a security, it must be borrowed and later covered. The general illiquidity of the municipal market makes this difficult.
Which of the following is a required disclosure on the Form U4? A) Employment history for the previous 3 years B) Employment history for the previous 10 years C) Residency for the previous 10 years D) Residency for the previous 3 years
B Explanation Form U4 requires an applicant to provide a 5-year residency history and a 10-year employment history. With regard to the employment history, the member firm must verify the previous 3 years.
A broker-dealer can rehypothecate (repledge) up to A) 50% of the equity balance in a customer's margin account. B) 140% of the debit balance in a customer's margin account. C) 140% of the equity in a customer's margin account. D) 50% of the debit balance in a customer's margin account.
B Explanation In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker-dealer repledges (rehypothecates) the securities as collateral to the lending bank. Broker-dealers are permitted to pledge up to 140% of the debit balance in the customer's account.
In an interdealer trade, if the seller delivers before the settlement date, which of the following statements is true? A) The buyer must only accept delivery if the seller gave advance notice of his intention. B) The buyer may accept the stock or refuse it without prejudice. C) The seller has violated the Uniform Practice Code. D) The buyer must accept delivery.
B Explanation In a regular way trade, the firm is not obligated to accept securities delivered before the settlement date (two business days after the trade date), but it may do so if it wishes.
Your client feels that GGZ, currently trading around 39, would be a good buy at 38. Therefore, she places an order to buy 200 GGZ at 38 GTC. On the ex-date, when the stock splits 2:1, the order is still on the order book. How is the order adjusted on the ex-date? A) Buy 400 GGZ at 38 GTC B) Buy 400 GGZ at 19 GTC C) Buy 100 GGZ at 76 GTC D) Buy 200 GGZ at 19 GTC
B Explanation In a stock split, the number of shares is increased and the price is reduced proportionately on the ex-date (200 shares × 2 = 400 shares; the new price is 38 × 0.5, or 19).
FINRA considers all of the following as prohibited conduct except A) trade shredding. B) honoring firm quotes. C) backing away. D) Interpositioning.
B Explanation Member firms are obligated to honor their firm quotes. Doing so is what is expected of them and is certainly not prohibited conduct. Backing away is the prohibited practice of failing to honor firm quotes. Interpositioning is placing a third party between the broker-dealer and the best available quote. This invariably results in a less favorable execution for the customer. Trade shredding is mentioned nowhere in the course other than this question. It is here to improve your in test-taking skills. On the real exam, you will see answer choices you have never heard of. So what. You know that honoring a firm quote is exactly what your firm must do. If that is the correct answer, don't worry about trade shredding other than to make a note on your board at the test center that it is a prohibited practice just in case it shows up again.
The initial confirmation of a when-issued municipal bond contains which of the following? Number of bonds involved in the transaction Settlement date Yield to maturity Total dollar amount due A) I and II B) I and III C) II and IV D) III and IV
B Explanation On a new municipal bond offering, where the customer receives a when-, as-, and if-issued confirmation, the final settlement date is not known; therefore, the amount of accrued interest is unknown (because it is payable up to, but not including, settlement). Thus, the total dollar amount is unknown because it includes accrued interest. The number of bonds purchased and the yield to maturity (price) are known and must be included on the confirmation.
The return by the receiving party of securities previously accepted for delivery or a demand by the delivering party for return of securities that have been delivered is called A) rejection. B) reclamation. C) closeout. D) redelivery.
B Explanation Reclamation literally means to reclaim or take back. It works for either party to the trade—the buyer or the seller when, after delivery has been made, it is determined that something is incorrect. Reclamation differs from rejection in that rejection occurs at the time of delivery, not afterward.
Which of the following is not good delivery for 470 shares of stock? A) Forty-seven 10-share certificates B) Two 100-share certificates and three 90-share certificates C) Four 100-share certificates and one 70-share certificate D) Eight 50-share certificates, one 40-share certificate, and one 30-share certificate
B Explanation Shares must add up to 100 or be in multiples of 100, with the exception of odd lots.
A specialist (designated market maker) must refuse not-held orders. good-for-a-month orders. stop limit orders. market orders. A) I and IV B) I and II C) II and III D) III and IV
B Explanation Specialists (designated market makers) cannot accept not-held orders or good-for-a-month orders. Not-held orders are the responsibility of floor brokers (commission brokers); these orders give the floor broker discretion as to time and price. Good-for-a-month orders are not standard orders. A time-qualified order must be day or good-til-canceled order.
One of your clients has a profit in STV common stock. The purchase price was $40 per share and is now $60 per share. The client is concerned that the stock might backtrack and some of the profit might be lost. One way to protect that profit would be to A) enter a sell limit order at $55. B) enter a sell stop order at $55. C) enter a sell limit order at $62. D) enter a sell stop order at $62.
B Explanation Stop orders, frequently called stop-loss orders, are used to protect an existing profit or prevent a loss. In the case of a client owning stock, the fear is that the stock will decline in price. Sell stop orders are always placed below the current market, never above. In this question, should the stock's price fall to 55 (or lower), the stop order will be triggered and a market order entered. This will preserve at least some of the profit. Sell limit orders are placed above the market, but that will never be executed unless the stock rises to at least $62. A sell limit order placed below the current market is, in effect, a market order and is immediately executed.
If a client has a margin account with $23,000 in securities and a debit of $12,000, and Regulation T is 50%, which of the following statements are true? The account is restricted. The client will receive a margin call for $500. The client may withdraw securities if she deposits 50% of the market value of the securities withdrawn. The account has excess equity of $5,250. A) II and III B) I and III C) I and II D) III and IV
B Explanation The account is restricted by $500 because the equity of $11,000 is less than the Regulation T requirement of 50% ($11,500). However, the client will not receive a margin call for the $500 because Regulation T applies only to the initial purchase. Because the account is restricted, any withdrawal of securities requires a cash deposit of 50% or a deposit of securities with a loan value of 50% of the value of the securities withdrawn. The account is $5,250 above the required minimum maintenance margin, but this amount is not considered excess equity.
A customer has a $10,000 debit balance. What is the maximum value of her securities that the broker-dealer can hypothecate? A) $5,000 B) $14,000 C) $10,000 D) $2,500
B Explanation The broker-dealer can hypothecate 140% of the customer's outstanding balance.
In an existing margin account with special memorandum account (SMA) of $2,000, if a customer wishes to buy 300 shares of ABC at $20 per share, how much must the customer deposit? A) $2,000 B) $1,000 C) $2,500 D) $3,000
B Explanation The customer wishes to purchase $6,000 worth of stock, and the Regulation T requirement is $3,000. The SMA has buying power of 2:1 when Regulation T is 50%, so $2,000 of SMA will purchase $4,000 of stock. Of the remaining $2,000 balance, the broker will lend 50%, so the customer must deposit $1,000.
AMZ Corporation has declared a cash dividend of $1.10. On the ex-dividend date, an open order to buy AMZ at 52 stop would A) be automatically adjusted to 51.90 stop. B) remain at 52 stop. C) be automatically adjusted to 52.10 stop. D) be automatically adjusted to 53.10 stop.
B Explanation When a stock goes ex-dividend, the price of the stock falls by the amount of the dividend. This would require an adjustment in the amount of the dividend to orders placed below the market. This is a buy stop order and those are placed above the market so there is no adjustment to the price. Remember the SLoBS, where the Sell Limits and Buy Stops are above the market, and BLiSS, the Buy Limits and Sell Stops are below the market
All of the following are minimum requirements for listing on the NYSE except A) market value of publicly held shares. B) earnings per share. C) number of publicly held shares. D) number of shareholders.
B Explanation While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.
A disclosure reporting page (DRP) must be completed on a person's Form U4 for all the following reasons except A) a civil suit resulting from an inheritance dispute. B) a bankruptcy. C) a period of homelessness. D) a tax lien.
C Explanation Homelessness is something that would be disclosed on a Form U4, but it is not subject to the additional scrutiny of a DRP. Bankruptcy, civil suits, and tax liens must all be disclosed on a DRP for additional review.
Which of the following organizations determines which over-the-counter securities are eligible for purchase on margin? A) Securities and Exchange Commission B) Financial Industry Regulatory Authority C) Municipal Securities Rulemaking Board D) Federal Reserve Board
D Explanation The Federal Reserve Board determines whether any security is marginable.
A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at $14, and she wants to protect her gain, which of the following orders should she place? A) Buy limit at 14 B) Sell stop at 13.75 C) Buy stop at 14.25 D) Sell limit at 14
C Explanation A buy limit order is used to buy at a lower price (when the market moves down). A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading.
Which of the following activities can take place in a cash account? A) Uncovered option writing B) Short sale of stock C) Purchase of new issue common stock D) Borrowing money
C Explanation A customer may only borrow money or securities from a broker-dealer in a margin account. Uncovered call options must occur in a margin account, and uncovered put options can only occur in a cash account when certain criteria are met. Short sales must occur in a margin account.
When a customer enters a sell order and is in possession of the certificates, a broker-dealer must determine all of the following except A) whether the securities are in deliverable form. B) the location of the securities. C) whether the transfer agent has accepted the securities. D) whether the client can make delivery promptly.
C Explanation A firm must make an affirmative determination and be reasonably sure the client can make prompt delivery. It isn't until after delivery (after the sell order has been accepted and the trade has taken place) that the transfer agent receives the certificates.
A registered representative recently had a child and is moving into a larger home. The representative must disclose this change in residential address on her Form U4 within A) 90 days. B) 60 days. C) 30 days. D) 45 days.
C Explanation Amendments to a Form U4 must be made within 30 days of the event.
Each of the following statements concerning fill-or-kill (FOK) orders and all-or-none (AON) orders are true except A) an AON order must be filled in its entirety. B) an FOK order must be filled in its entirety. C) an AON order must be canceled if the whole order cannot be executed immediately. D) an FOK order must be canceled if the whole order cannot be executed immediately.
C Explanation An FOK order must be executed immediately in its entirety or else it is canceled. An AON order must be executed in its entirety but is not canceled if the whole order cannot be executed immediately.
After several unsatisfactory telephone calls, a customer of a FINRA member firm is upset with her registered representative for failing to explain the risks of the ETNs he recommended to her. She sends him a complaint via text message about his actions. Under FINRA Rule 4513, the agent should A) do nothing because the complaint is not in writing. B) tell the customer he is willing to offer rescission. C) bring the customer complaint to his employer immediately. D) call the customer, apologize, and attempt to correct the problem.
C Explanation Any written customer complaint (an email or text message is considered written) must be brought to the attention of the agent's supervisor without hesitation.
Your margin account client whose account has a long market value (LMV) of $10,000 and a debit balance of $3,000 would have A) SMA of $7,000 and buying power of $14,000. B) SMA of $5,000 and buying power of $10,000. C) SMA of $2,000 and buying power of $4,000. D) SMA of $3,000 and buying power of $6,000.
C Explanation With LMV of $10,000 and DR of $3,000, the account has equity of $7,000. The Regulation T requirement is 50% of the LMV, or $5,000. That means the account has $2,000 of excess equity that is journaled into SMA. Buying power is the SMA divided by the Regulation T requirement ($2,000 ÷ 50%), which equals $4,000
When a member firm receives a written complaint against one of its representatives, the person first informed about the complaint is A) the representative subject to the complaint. B) the subject representative's immediate supervisor. C) the designated principal. D) FINRA.
C Explanation Complaints must immediately be disclosed to the firm's designated principal for handling complaints.
Broker-to-broker confirmations must be sent no later than A) the end of day on the date of the trade. B) the trade date plus two business days. C) the next business day. D) the regular way settlement date.
C Explanation Confirmations between brokers (broker-to-broker confirms) must be sent no later than the next business day following the transaction (T+1).
A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account? A) The equity will increase. B) The debit balance will be reduced. C) The equity will remain the same. D) The market value will increase.
C Explanation Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.
Sell order tickets must be A) marked only if they are long sales. B) marked only if they are short sales. C) marked as either long or short. D) executed in accordance with the appropriate rules, but not necessarily marked.
C Explanation Every sell order must be marked as either a long sale or a short sale.
Although the Federal Reserve Board (FRB) and FINRA have rules that set margin requirements, member firms may A) follow requirements that are less stringent. B) choose to have no minimum maintenance requirements. C) increase these requirements through in-house rules. D) increase or decrease these requirements through in-house rules.
C Explanation Firms may set their own margin requirements at more stringent levels than the FRB and FINRA rules. However, a firm may never go below the FRB and FINRA margin requirements.
Last-sale information is always available for all of the following securities except A) CBOE listed option contracts. B) Nasdaq. C) over the counter (OTC), non-Nasdaq. D) NYSE listed.
C Explanation Last-sale information is available for listed (exchange-traded) securities and for all Nasdaq securities. While there are a number of sources for last-sale information in general, it may not always be available for a security that is OTC non-Nasdaq.
A customer has a margin account that shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has special memorandum account of $5,000. The long market value at maintenance is A) $150,000. B) $115,000. C) $120,000. D) $95,000.
C Explanation Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by 0.75 ($90,000 / 0.75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ).
Which of the following orders are not placed on the order display book? Buy stop limit Buy stop Market Not held A) I and IV B) I and II C) III and IV D) II and III
C Explanation Market orders are executed immediately and are not placed on the order book. Not-held orders are not presented to the order book.
A client places a sell stop order good for the day only. Under NYSE rules, you must A) partially write an order ticket and complete the ticket before market close. B) write an order ticket only if the order is executed. C) write an order ticket upon receipt of the order. D) partially write an order ticket and complete only upon execution.
C Explanation Order tickets must be written and time stamped upon receipt of the order.
Which of the following orders on the order book would be reduced for a cash dividend on the ex-date? A) Buy 100 XYZ at 60 stop B) Buy 100 XYZ at 50 DNR C) Sell 100 XYZ at 50 stop D) Sell 100 XYZ at 60
C Explanation Orders on the book adjusted on the ex-date for a cash dividend are those below the current market: buy limits and sell stops. The buy limit at 50 is marked DNR (do not reduce), so the only order reduced is the sell stop at 50.
KLP common stock has been trading at or near $25 per share all day. Your client would like to buy 500 shares of KLP at 25, but he is willing to accept fewer shares at that price. Which of the following orders fulfills his intentions? A) Limit order to buy 500 shares of KLP at 25 AON (all-or-none) B) Limit order to buy 500 shares of KLP at 25 FOK (fill-or-kill) C) Limit order to buy 500 shares of KLP at 25 IOC (immediate-or-cancel) D) Market order to buy 500 shares of KLP
C Explanation Partial execution is permissible on an IOC order.
Under Uniform Practice rules, all of the following deliveries are eligible for reclamation except A) registered bonds delivered without a signature guarantee. B) bonds delivered subject to a partial call. C) bonds delivered subject to an in-whole call. D) bearer bonds delivered with missing coupons.
C Explanation Reclamation is available if a member inadvertently accepts a delivery from another member as good and later discovers that the delivery should have been rejected. Reclamation represents the right to return a security that had previously been accepted. Bonds subject to an in-whole call are never subject to reclamation. The only certificates the seller could have delivered are those subject to the call. Unless identified at time of trade, bonds subject to a partial call are subject to reclamation.
A registered principal must approve all orders A) within one business day. B) prior to execution. C) by the end of the trading day. D) prior to entry.
C Explanation Registered principals must approve all orders promptly after execution. FINRA interprets this term, however, as by the end of the trading day. Orders may always be approved earlier, but are not required to be.
A trade is made for $10,000 of municipal bonds on an ex-legal basis. That means A) the debt is not a legal obligation of the issuer. B) the legal opinion is qualified. C) the legal opinion is not attached. D) the delivery can be refused by the purchaser.
C Explanation Regular way delivery for municipal bonds is with the legal opinion attached. However, under MSRB Rule G-12, if, at the time of the trade, it is specified that the delivery will be made ex-legal, it is a good delivery. In this case, the bond will typically be stamped ex-legal.
Regulation T applies to A) margin accounts only for nonexempt securities. B) margin accounts only for listed securities. C) both cash and margin accounts for nonexempt securities. D) both cash and margin accounts for all unlisted securities.
C Explanation Regulation T controls the credit that broker-dealers extend in all types of accounts and only applies to nonexempt securities.
Which of the following transactions must occur in a margin account? Short sale of stock Purchase of stock to cover a short position Long purchase of stock Long sale of stock A) I and III B) II and IV C) I and II D) III and IV
C Explanation Short sales must always occur in a margin account because the investor is borrowing stock from the broker-dealer. Covering must take place in the same account.
Stop orders may be used for each of the following except A) to protect profits on long positions. B) to establish positions. C) to lock in a specific price to close out a position. D) to protect profits on short positions.
C Explanation Stop orders are contingent orders that are triggered when the stock trades at or through a stated price. When triggered, they become market orders to buy or sell. They are used by technical traders to establish positions above or below resistance and support levels, respectively. Stop orders never guarantee a specific execution price.
Margin requirements on exempt securities (U.S. government securities and municipal securities) are set by A) the Securities and Exchange Commission (SEC). B) the Federal Reserve Board (FRB). C) the designated examining authority (DEA). D) the Department of Enforcement (DOE).
C Explanation The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's self-regulatory organization or DEA.
A customer places an order to buy 300 DWQ at 140 stop, but not over 140.25. This is A) a buy limit order. B) a buy stop order. C) a buy stop limit order. D) a market not-held order.
C Explanation The customer has entered a stop limit order. If the stock rises to the stop price of $140, the order is elected and then becomes a buy limit order at 140.25, meaning an order to buy at 140.25 or lower.
On the same day in a new margin account, a customer buys 1,000 XYZ at $80 and sells short 1,000 ABC at $20. Which statements are true? The margin deposit is $50,000. The margin deposit is $60,000. The minimum maintenance margin requirement is $25,000. The minimum maintenance margin requirement is $26,000. A) I and III B) II and III C) I and IV D) II and IV
C Explanation The customer must put up 50% on both the purchase and short sale. That results in a margin deposit of $50,000. Buying 1,000 shares at $80 per share is a purchase of $80,000. The initial margin requirement of 50% is $40,000. The short sale of 1,000 shares at $20 per share requires 50% of the $20,000 proceeds, or $10,000. Combining those two results in a margin deposit of $50,000. The maintenance requirement on the long position is 25% of the current market value (25% × $80,000 = $20,000). The maintenance requirement on the short position is 30% of the current market value (30% × $20,000 = $6,000). Those two total $26,000.
If a customer buys 1 ABC Jan 50 call at 2 and 1 ABC Jan 50 put at 4 when ABC is at 49, the customer must deposit A) $500. B) $400. C) $600. D) $200.
C Explanation The customer purchased a straddle and must pay the full cost of both options ($200 + $400 = $600 total premium).
When referring to a stock, the term spread refers to A) the dealer's markup. B) the range between the high and low price for a particular year. C) the difference between the bid and asked prices. D) the range between the high and low price for a particular trading day.
C Explanation The term spread refers to the difference between the bid and asked prices.
Under NYSE rules, a not-held order A) requires discretionary authority from the customer. B) is good til canceled. C) is good for the day only. D) is a limit order.
C Explanation Under NYSE rules, a not-held order where a customer gives you authority over the price or timing of the order is good for that day only.
In a new margin account, a customer sells short 1,000 shares of XYZ at $30 per share and deposits the required margin. If the stock subsequently falls to $25 per share, the equity in the account is A) $15,000. B) $10,000. C) $20,000. D) $25,000.
C Explanation When selling short, the initial credit balance is the sum of the proceeds of the sale ($30,000) plus the 50% Regulation T margin requirement ($15,000) or $45,000. The beginning equity is $15,000 (CR − SMV = EQ, or $45,000 − $30,000 = $15,000). If the market value falls to $25,000, equity is determined as $45,000 minus $25,000 equals $20,000.
Your broker-dealer is not self-clearing, but instead, is an introducing broker-dealer. Therefore, all extension requests made to your broker-dealers self-regulatory organization (SRO) on behalf of customers would be made by A) the customer. B) the broker-dealer. C) the broker-dealer's clearing agent. D) any party who represents the customer, such as an attorney.
C Explanation While extension requests are granted on behalf of customers, the request to the SRO cannot come directly from the customer or anyone representing him. For self-clearing broker-dealers, the extension request will come from the broker-dealer. However, for introducing firms that do not clear their own trades, the request comes from the clearing agent.
Arbitration and mediation are two services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are not true? Mediation is mandatory; arbitration is not. Arbitration always results in a binding decision; mediation may not. If arbitration is unsuccessful, the dispute moves on to mediation. A mediator in a dispute may not serve as an arbitrator in the same dispute. A) I and IV B) II and III C) II and IV D) I and III
D Explanation Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.
A market order to purchase 100 shares of XYZ common stock is A) valid at the stipulated price only. B) executed at the lowest price of the day. C) executed at the market close. D) good for that day only.
D Explanation A market order is executed at the best price in the market at the time the order is entered. Because these orders have guaranteed execution (there is always a "best" price), there would be no practical reason for the order to be carried over to another day. There is a market on close order, but that would have to be specified in the order. A stipulated price is a limit order.
Written notice of intent to deliver before an agreed-to settlement date is required in which of the following transactions? A) A Regulation T delivery B) A regular way settlement C) A delayed delivery D) A seller's option
D Explanation A seller's option trade gives the seller a specified settlement date that exceeds the regular way delivery date to deliver the securities. If the seller wishes to deliver them before the agreed-on settlement date, she must provide 24-hour notice to the buyer.
A properly signed and guaranteed stock or bond power is A) an authorization delegating voting power to another person. B) a legal power of attorney authorizing the bulk transfer of variable annuities, whose separate accounts are invested in more than 75% equity or debt, to a new custodian. C) a legal right of the owner or proxy to vote stock as he chooses. D) a document that can be attached to a certificate, authorizing transfer of ownership to another party or when a security is hypothecated.
D Explanation A stock or bond power is an instrument separate from the certificate by which an owner indicates the intent to transfer ownership or pledge the securities as collateral for a loan.
A New York Stock Exchange designated market maker has all of the following responsibilities except A) handling odd-lot market orders. B) acting as broker for orders placed on the book. C) providing liquidity. D) preventing the stock price from falling.
D Explanation Although designated market makers buy and sell as principals to maintain a fair and orderly market and provide liquidity, they are not obligated nor do they have a responsibility to prevent a decline in price.
One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? $41.91 $42.27 $42.40 $42.75 A) I and II B) I and III C) III and IV D) II and IV
D Explanation As a sell stop order with a limit of $42.15, no order may be executed below the limit price of $42.15. This order will be triggered at the price of $42.40. The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution.
A customer has $15,000 of equity in a margin account. That represents 30% of the market value. Therefore, the debit balance is A) $21,428. B) $10,500. C) $50,000. D) $35,000.
D Explanation Bring out your middle school algebra book. $15,000 is 30% of what number? Divide $15,000 by 0.30 and the market value is $50,000. With a market value of $50,000 and equity of $15,000, the debit balance is the other $35,000. Perhaps this method is easier for you. If $15,000 is 30% of the market, then the debit must be the other 70%. 70% is 2⅓ times 30%, so $15,000 times 2⅓ = $35,000.
The DRS is a system for A) direct registration of salespersons. B) direct reporting of sales. C) daily reporting of sales. D) direct registration of securities.
D Explanation DRS stands for Direct Registration System. It is a program that began in the mid-1990s as an alternative to "street name" registration for customer securities. Like street name, DRS is based on electronic bookkeeping. In direct registration, a stock is registered in an investor's name, but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form, instead of a broker-dealer. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
The sale of securities in a restricted margin account affects all of the following except A) special memorandum account. B) market value. C) debit balance. D) equity.
D Explanation Equity is not affected unless the customer elects to withdraw half the proceeds of the sale.
Sell orders for equity securities A) do not need to be marked, only executed in accordance with the appropriate rules. B) must be marked only if they are short sales. C) must be marked only if they are long sales. D) must be marked long or short.
D Explanation Every sell order in an equity security must be marked as either a long sale or a short sale.
Which of the following order types are available to customers for use in NYSE equity markets? Fill or kill (FOK) Immediate or cancel (IOC) All or none (AON) Order cancels other (OCO) A) I and III B) I and IV C) II and III D) II and IV
D Explanation IOC and OCO orders are available to customers for use in the NYSE equity markets. FOK and AON orders are no longer permitted in NYSE equity markets.
In a cash account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the customer must deposit A) $14,700. B) $14,550. C) $14,400. D) $14,100.
D Explanation In a cash account, the customer must deposit 100% of the value of the stock purchased ($14,400). However, to determine the actual deposit, subtract the $300 in premium income received. By depositing $14,100, the customer will have $14,400 in the account—the difference being the premium income credited to the account on settlement date.
When a registered representative submits a customer order, all of the following information would be shown except A) the stock symbol. B) a time stamp. C) the number of shares. D) the price of a market order.
D Explanation Price would not be included on a ticket for a market order because that is unknown. When a customer enters a market order, it will be executed at the best prevailing price in the market. On the other hand, price would be on the ticket for a limit, stop, or stop limit order.
There are a number of different types of orders that a registered representative can enter for a client. Of the following, which one would be most appropriate for a client wishing to protect a profit on a short stock position? A) A sell limit order B) A buy limit order C) A sell stop order D) A buy stop order
D Explanation Protecting a profit on a short position means covering (buying back) the stock before its price increases above the original sale price. That means buying the stock. The investor would enter the buy stop order with a stop price above the current market, but below the original sale price. A buy limit order is placed below the market, and that is of no help if the price increases. A market order is executed at once, and selling the stock is not appropriate when the investor has already sold it.
Which of the following would accelerate a decline in a bear market? A) Buy limit B) Sell limit C) Buy stop D) Sell stop
D Explanation Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orders can accelerate declines in the price of the stock.
If a customer buys $10,000 worth of stock in a cash account, then sells the shares for $12,000 without first paying for the buy side, and then requests the $2,000 profit, which of the following statements are true? The $2,000 profit cannot be sent to the customer until she pays for the buy side in full. The $2,000 can be sent to the customer, but the account will be frozen for 90 days. If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted. Both trades must be switched to the customer's margin account, where buying and selling in this manner are acceptable practices. A) I and II B) I and III C) III and IV D) II and III
D Explanation Selling before paying is called freeriding and is prohibited. The penalty for freeriding in a cash account is that the account will be frozen for 90 days, and orders will not be accepted without cash or securities on deposit in advance. Transactions in margin accounts are subject to the same basic rule.
All of the following would affect a customer's equity balance except A) interest charged. B) withdrawal of special memorandum account (SMA). C) cash dividends. D) stock dividends.
D Explanation Stock dividends do not affect total equity in an account, only the number of shares contained (but at a lower per-share price). Cash dividends increase equity, while withdrawal of SMA and interest charges assessed against the account decrease equity.
Your customer has made a margin purchase of 100 shares of DMF at 50. Two days later, before the customer has met his call, the current market value of DMF is 60. How much must your customer now deposit? (Regulation T is 50%.) A) $3,000 B) $1,500 C) $2,000 D) $2,500
D Explanation The investor must come up with the initial call of $2,500. The amount of margin required for a new purchase is based on the current market value of the security at the time of purchase.
If an investor opens a new margin account and sells short 100 shares of COD at 87.25, with Regulation T at 50%, what is the investor's required deposit? A) $2,181.25. B) $2,617.50. C) $8,725.00. D) $4,362.50.
D Explanation The required deposit is calculated by multiplying the market value of $8,725 by the Regulation T requirement of 50% ($4,362.50).
Last week one of your customers placed a good-til-canceled order to sell 200 shares of ABC with an 18 stop when the stock was trading at $18.85. It is now the ex-date for a $0.55 dividend and the order has not yet been executed. What has happened to your customer's stop order? A) It is increased to $18.55. B) It is canceled. C) It remains at $18. D) It is reduced to $17.45.
D Explanation Unless the customer has given DNR (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend.
A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request? A) 5 business days B) 3 business days C) 7 business days D) 10 business days
D Explanation Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.
In performing their natural job functions, all of the following may act in a principal capacity in a transaction with customers except A) broker-dealers. B) designated market makers (DMM) on the NYSE. C) OTC market makers. D) branch managers of FINRA member firms.
D Explanation When acting as a principal in a transaction, you are buying for or selling from inventory. Although branch managers of member firms are generally required to be registered as principals, that is different from acting in a principal capacity in a transaction. DMMs facilitate trading on the floor of the NYSE. Doing that sometimes requires them to buy or sell as principals. OTC market makers, by definition, act as principals. The term broker-dealer means that the firm can act either as a broker or a dealer. There are a number of words used in this exam than can have multiple meanings. Principal is one of those.
A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is A) 100 % of the short market value. B) 30% of the short market value. C) $2.50 per share. D) $5 per share.
D Explanation When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value. $5 is more than 30% of $14 ($4.20).
