SIE Practice Test 4

All of the following are considered to be "custodial property" that can be given by a donor to a minor under the Uniform Gifts to Minors Act or the newer Uniform Transfer to Minors Act except: A) Bearer bonds B) a life insurance policy C) an annuity contract D) a futures contract

D The original UGMA only provided for gifts of cash or securities. The newer UTMA expanded the definition of "custodial property: to any type of asset including real eastate and tangible and intangilble personal property. However, futures contracts are specifically excluded form coverage in most states.

All of the following are typically services provided in a prime brokerage account EXCEPT A) Investment advice B) Securities lending C) Centralized trade settlement while still using multiple executing brokers D) Calculating a total return on all investments

A A prime borkerage account is a bundled package of services offered by a broker-dealer to hedge funds and other institutional investors that use aggressive trading strategies. A written prime borkerage agreement is required to open a prime brokerage account. Investment advice is not typically part of the package. The other services are typically part of the package.

A corporation may issue refund bonds to accomplish any of the following EXCEPT: A) To increase the capitalization of the company B) To retire an existing bond issue C) To reduce its interest costs D) To take advantage of a substantial drop in interest rates

A A refund is a new bond issue that is used to reire an existing bond issue. Capitalization is the corporation's long term debt, stock, and net worth. The capitalization of the corporation would remain uncahgned becasue the amount of the debt would remain unchagned. Refund bonds are frequently issued when there is a substantial drop in interest reated to reduce interset costs.

A warrant that is issued with a debenture A) allows the holder a long-term ability to exercise and buy a specific number of shares of common stock. B) allows the holder a short-term ability to exercise and buy a specified number of shares of common stock. C) pays interest in relation to the debenture until the warrant is exercised. D) pays dividends in relation to the stock to which it converts prior to exercise.

A A warrant is a long-term derivative security that allows the holder the ability to buy a specific number of shares at a specific price. Warrants differ from rights in that warrants are normally good for years or in perpetuity (until the company no longer exists). Rights are short-term and genrally expire after 90 days. Warrants are derivative securities that will not pay dividends or interst, however once converted, the stock that is purchased as a result of the warrant may pay dividends.

All of the following actions by the federal government would be effective in combating an economic recession EXCEPT: A) Increasing individual income tax rates for all citizens B) The Federal Reserve lowers interest rates C) Additional government projects and spending on infrastructure D) Additional borrowing by the federal government

A An increase in taxes would cause an increase in a recessionary period because an increase in taxes woul cause a further tightening of money available for spending by the consumer therby worsening the recession.

As inflation increases over time, the best hedge against it has historically been provided by which of the following types of securities? A) Common stocks B) Preferred stocks C) Government Securities (T-Bonds, etc.) D) Convertible bonds

A Choices B, C, and D are fixed income instruments which are vulnerable to inflation and/or purchasing power risk. common stock carries the greatest risk as well as the greatest reward potential. Historically, common stock has outperformed the other choices and has been the hbest hedge against inflation.

A corporation that issued several types of securities is being liquidated. Investors who own which of the following securities will have the most junior claim to company assets? A) Common stock B) Convertible bonds C) Preferred stock D) Collateral bonds

A Common stock has the most junior claim of the choices listed. Common stock has a "residual" claim on company assets during liquidation, meaning that holders of common stock are lowest on the list of those receiving a portion of company assets.

The type of policy which advocates that the federal government uses taxation and increasing spending programs to foster a growing economy is called A) fiscal policy B) monetary policy C) supply-side policy D) trade policy

A Fiscal policy includes federal taxation and spending policies inteneded to level out business cycles, achieve full employment and price stability and sustained growth for the economy. Monetary policy involves the decisions of the Federal Reserve Board with regard to money supply and the extension of credit. Supply-side policies focus on tax cuts. Trade policy, although imporatn, doesn't really apply in this quesiton.

Which of the following could be used to meet a Reg T call on an initial transaction in a customer's margin account? I. A cash deposit equal to the amount of the call II. An escrow receipt with a value that is equal to the amount of the call III. Listed securities which have a loan value that is equal to the amount of the call IV. Listed securities which have a market value that is equal to the amount of the call A) I & III B) II & III C) II & IV D) I & IV

A If securitiese are to be deposited they would have to have a LOAN VALUE equal tothe margin purchase specified or two times the Reg T Cash Requirement. Remember that securities have a loan value of 50% of their market value. A Cash deposit equal to call would also work, but not an escrow receipt.

Which of the following is CORRECT about a JTWROS Account (Joint Tenants with Rights of Survivorship)? A) Securities transactions may be placed by any individual listed on the account. B) The account must be limited to two individuals only. C) These accounts are generally taxed at a higher rate than individual accounts. D) If one of the account owners dies, the surviving member(s) of the account will receive all of the assets of the account unless the deceased individual's will states otherwise.

A JTWROS registration means that upon the death of any one of the tenants (there may be more than two), his or her interest passes automatically to the survivign tenatns. The transfer avoid probate. Although it is frequently used by married couples, its use is not limited to married couples or familiy members. This form of ownership overrides providsions in the decedent's will. As with any joint account, any individual member of the account may place trades in the account.

mong the various economic theories, the one that says that economic growth and stability can be promoted by the active intervention of government fiscal policies in the marketplace is referred to as which of the following? A) Keynesian B) Supply-side C) Monetarist D) Libertarian

A Keynesian economic theory believes that active government intervention in the marketeplace is the only way to ensure economic growth and stability. Supply-side theorists believe that the less government intervention in the marketplace, the better. Monetarists believe that the money supply is the key to economic growth.

When helping your customer select a mutual fund all of the following would be primary considerations EXCEPT A) the NAV (Net Asset Value) of the fund B) the fund's historical performance C) sale charges D) the fund's risk and volatility profile

A Of the chocies offered, the lcient and RR should be concered with the investment risk, pperformance, and sales charges. The Net Asset Value is a facotr but investors generally base investment decisions on objective/risk, performance, and charges, and the NAV is not an overriding concern during the selection process. Of course, once the investor owns a fund the NAV is very important.

An investor elects to exercise their option contract and ends up buying 100 shares of a common stock at the exercise price listed on the contract. This is the result of the investor exercising a: A) Long Call B) Short Call C) Long Put D) Short Put

A Only the buyer of an option cotnract can choose or "elect" to exercise their option contract So if the buyer of an option contract elects to exercise and ends up buying 100 shares of a common stock at the exercise price listed on the contract, this would be the result of exercising a long call option.

An investor decides to buy a block of corporate bonds. What would be regular way settlement for this bond trade? A) T+2 - trade date plus two business days B) T+3 - trade date plus three business days C) T+1 - trade date plus one business day D) Same day settlement would be required.

A Regular Way Settlement for corporate securities transactions is trade date plus 2 business days or T+2.

The Depository Trust & Clearing Corporation's (DTCC's) Continuous Net Settlement (CNS) System acts as central counterparty for clearance and settlement of broker-to-broker transactions in A) most equity, corporate bond, and municipal bond transactions in the United States. B) mostly equity securities transactions, with little or no involvement in corporate and municipal debt transactions. C) mostly corporate and municipal debt transactions, with little or no involvement in equity securities transactions. D) equity options only, with no involvement in other equity or debt transactions.

A The DTCC'S CNS System acts as the central counterparty for clarance and settlement of virutally all broker-to-broker equity, corporate, and municipal bond/UIT trading in the United States.

The SEC "quiet periods" for an IPO of an emerging growth company as applied to the underwriters are: A) eliminated B) shortened C) lenghtened D) remain unchanged

A The SEC "quiet periods" are the periods of time surrounding a public offering of a new issue when pomotional materials are gneerally prohibited. The periods generally start from the date a decision is made by the issuer to make a public offering and extend until a certain number of days after the effective date of registrartion statement. With respect to an IPO of an emerging growth company, the quiet periods are eliminated.

Which of the following is NOT required on a customer's order ticket? A) The customer's investment objective B) Whether or not the order is Discretionary C) Account number D) The identity of the RR who entered the order

A The customer's investment objective is not required on order tickets. It is required on the customer's account form.

When a member firm receives a sell long order for a customer account the member must have reasonable assurance that the customer will deliver the securities within A) 2 business days. B) 2 calendar days. C) 4 business days. D) 4 calendar days.

A The member must have a reasonable assurance that the customer will deliver by settlement date, which is trade date plus 2 business days for regular way trade (T+2).

The separate account of a Variable Annuity will fluctuate in value with which of the following? A) Market value of securities in the account B) Fixed value of bonds in the account C) The separate account does not fluctuate in value but is a set amount D) The S & P 500 Index

A The value of the separate accoutn of a Variable Annuity will fluctuate based on the marekt value of the securities in the account and therefore has market risk.

A corporate bond called at 108 1/8 would pay the bondholder: A) $1,084.50 B) $1,081.25 plus accrued interest C) $1,081.25 minus accrued interest D) $1,000 plus accrued interest of $1.25

B The premium price of 108 1/8 would represent $1,081.25 (108 = $1,080, 1/8 x $10 = 1.25), and further the investor would be entitled to the accrued interest.

Which of the following would contain the conditions and agreements of an upcoming issue of bonds by a corporation? A) These would be contained in the Tombstone Ads produced for the bonds. B) These would be contained in the bond's indenture. C) These would be contained in the underwriter's agreement. D) These would be contained in the legal opinion of the bond.

B A bond's indenture would contain all of the agreement and conditions that apply to a corporate bond issue.

If a trader places an order to write a naked call, this transaction would be referred to as: A) opening covered B) opening uncovered C) closing covered D) closing uncovered

B AN option order that establishes a new investment position or increases the size of an existing investment position is call an "opening" transaction. If the call is naked or uncovered, the option writer does not own the underlying stock that is the subject of the option.

When an investor is deciding whether to buy puts or sell the stock short, buying the puts offers all of the following advantages EXCEPT? A) The same or greater profit potential versus selling the stock short B) Time value dissipates C) Smaller capital required D) Limited loss potential

B Advantages to buying puts over selling the stock short inlcude the fact that there is a smaller capital commitment but the same or greater profit potential. Your only risk is the premium paid to buy the option and therfore the premium is your maximum loss potential. The fact that time value decreases is a true fact ubt it would NOT be considered an advantage.

Which of the following would not be a consideration in determining whether a customer account has been excessively traded (churned) by the RR? A) RR discretionary authority over the account B) The quality of the securities C) The RR's reasons for the trades D) The account turnover

B All but choice B would be consideration. The quality of the securites could be an important factor in whether the trades were suitable but not generally a factor for determining churning.

Which of the following statements is TRUE regarding an SEC Regulation A Offering? A) A prospectus must be delivered B) The offering may not exceed $50 million C) A registration statement must be filed with the SEC D) A maximum of 35 accredited investors may purchase the securities

B An SEC Regulation A offering is used for small issues (i.e. not more than $50 million). An offering cirucular is used instead of the satndard registration statement and prospecturs. "Accredited investors" are exempt from the maximum number of investors permitted.

When an individual passes a licensing examination required by FINRA, that individual will then be required to complete the Regulatory Element of Continuing Education A) within 1 year of initial registration and every year thereafter. B) within 2 years of initial registration and every 3 years thereafter. C) within 3 years of initial registration and every 3 years thereafter. D) within 4 years of initial registration and every 4 years thereafter.

B Registered Persons must complete the Regulatory Element of their Continuiing Education requirement within 120 days afte rthe anniversary of either: -The second anniversary date of their intitial registration and -Every three years thereafter as long as the person remains registered.

Chuck is being laid off of his position at his employer. He has a Qualified 401(k) Plan with this employer, but because of the circumstances of his termination, he refuses to maintain any contact with the former employer or the 401(k) Plan that was provided by that employer. Because of this, the employer has instructed the provider of the 401(k) Plan to distribute a check to Chuck for the total amount. Which of the following is TRUE regarding this scenario? A) Since Chuck is being laid off, the check that is received can be deposited by Chuck into his checking account and used on a tax-free basis due to the circumstances under which Chuck lost employment. B) Chuck should seek to roll over the funds from the 401(k) to another 401(k) at a new employer or to a Traditional IRA within 60 days to avoid taxes and penalties. C) Because of the fact that this was a 401(k) Plan, Chuck must roll the funds into another 401(k) Plan and is not permitted to roll the funds into an Individual Retirement Account (IRA). D) If Chuck gets a check directly from his former employer, he will have no choice but to pay ordinary income taxes on the sum of the check, regardless of whether or not he intends to reinvest or roll over the funds to a new plan.

B Chuck has 60 days to roll the funds into another 401(k) Plan or inteo a Traditional IRA in order to avoid taxation and/or penalties for early distributions if he is under 59 1/2. Funds can be rolled in to an IRA and Chuck is not forced to pay taxes as long as funds are rolled over within 60 days. Chuck is NOT permitted to deposit funds on a tax-free basis becasuse of the circumstances of loss of employment.

Which of the following taxes would be deferred on contributions made by an individual to her 401(k) plan? A) Unemployment tax at the Federal Level B) Income tax C) Medicare taxes D) Real estate taxes

B Contributions to a 401(k) plan defer income taxes until distributions from the plan are taken. In theory, this allows the investor to pay lower income taxes becuse income during retirement is expected to be lower than current income levesl form employment. Medicare and unemployment at the federal and state level are deducted from an employee's check regardless and cannot be not deferred because of the reitrment plan. Lastly, real estate taxes have nothing to do with 401(k) contributions.

When a bank has excess reserves and the bank loans those excess reserves to other banks that need to borrow to meet their reserve requirements, the excess reserves that are loaned are called A) Discount window funds B) Federal Funds C) Excess equity D) Money market funds

B Excess reserves of commercial banks which are loaned to other banks needing overnight loans to meet their reserve requirements are called Federal Funds. Federal Funds are borrowed at the Federal Funds Rae which is generally higher than the Discount Reate. The Discount Rate is the rate that would be paid if the bank borrowed directly from a Federal Reserve bank at the discount window to meet its reserve requirement.

A customer does not submit payment for the securities he purchased on a timely basis. What happens in this situation? A) All future customer transactions require pre-approval of the RR's supervising principal. B) For a period of 90 days, the member firm must ensure that no margin purchases are allowed in the customer's account. C) The customer's account is frozen for 30 days. No transactions are permitted. D) There are no consequences to the customer's in response to the late payment.

B In effect, the customer must have cash in his account to cover any purchase order before the uby will be exercuted. The member firm cannot extend credit to the customer. This is a Reg T requirement.

A client enters an order for the purchase of a block of 200,000 shares of Company X. Just prior to entering the large order, the RR enters an order in their own personal account for 5,000 shares. What BEST describes what the RR has done? A) The RR has engaged in free-riding on the purchase. B) The RR has engaged in front running on the purchase. C) The RR has engaged in churning on the purchase. D) The RR has engaged in insider trading on the purchase.

B In this situation, the term that best describes this RR's actions would be front running. Other infractions could be ijmplied, but front running is, by definition, entering an order ahead of another order to benefit from fluctuations in the market due to a large volume of purchasers.

An investor is considered "uncovered" in which of the following scenarios involving option contracts? The investor: A) buys 1 XYZ Call option with no other stock positions B) buys 100 shares of ABC common stock and sells 1 ABC put option C) buys 100 shares of XYZ common stock and sells 1 XYZ call option D) buys 1 ABC put option with no other stock positions

B Long stock positions do not coer a short put contract. The most common way that the seller of a put contract is covered is by having funds on hand in their account that are equal to the toal exercise value of the contract in the event that hte seller of the put receive an exercise notice. Buyers of options are not considered "covered" or "uncovered," because the buyer decideds whether or not the option is exercised. If an investor owns 100 shares of a stock and sells a call agianst that stock, the investor is consered covered. Selling a call by itself with no stock position would be considered "uncovered."

Of the following statements which are true about market orders made "at the opening"? A) Their priority is at parity with limit orders on the book. B) Their priority is above limit orders on the book. C) They are subordinate to limit orders. D) "At the opening" orders cannot be used for market orders.

B Market orders at the opening always have precednece over limit orders on the NYSE

fter taking the information from a new client for the opening of a new account, an RR submits this information to his BOM. The BOM when reviewing the new account information notes that the only address listed is that of a P.O. Box. Under what circumstances can the account be approved? A) The new client is a personal friend of the RR who will be in charge of overseeing the new account. B) The new client agrees to provide a real address of a home or business, even though he insists that all correspondence be sent to the P.O. Box. C) The new client submits a written statement stating that for convenience purposes, he only uses a P.O. Box for all correspondence. D) The new client tells the RR and the BOM that he has not yet established a place of residence in the area and that the P.O. Box is the only fixed address he can give.

B New accoutn information must include a real address. A P.O. Box is not acceptable as an address. Correspondence can be sent to a P.O. Box if the client desires, but the client must provide the address of home or business to open the account.

Predictions about the future performance of mutual funds and variable annuities are A) permitted if the basis of the prediction is provided. B) not permitted, regardless of the situation. C) permitted if prepared by an outside and unbiased analyst. D) not permitted unless reviewed by FINRA 10 days before first use.

B Predictions or guarantees abaout future performance of variable products and investment companies are not allowed under any cirumstances.

Of the following investments, which has the highest potential for capital appreciation and also the highest risk? A) Bonds issued by a municipality B) The common stocks of a corporation C) The preferred stocks of a corporation D) Bonds issued by a corporation

B Riskiest investments in order: common stock, preferred stock, corporate bonds, then municipal bonds. All of the items listed are fixed income securities EXCEPT for the common stock. This means that each of them pays interest or a fixed divident other than the common. Common stock appreciates and has optionall dividends. Common has the greatist risk potential and greatest reward potential.

A floor broker executing an order for a public customer asks the designated market maker to guarantee a price while giving the floor broker an opportunity to obtain a better price for the customer. This is known as A) a stop order B) stopping stock C) best efforts order D) a limit order

B Stopping stock is a favor that a designated market maker can do for a floor broker. The floor borker knows they have the stock sold if they are "stopped" but thye can still try to get better price in the market place.

If an investor is looking for information about a particular mutual fund, the BEST source of that information will be the A) fund's accounting documents such as the balance sheet and income statement. B) fund's prospectus, which contains investment strategy, management style/structure, sales load and fee structure, and more. C) investment manager of the fund who can provide a specific listing of all investments in the fund at any given point in time during a trading day. D) SEC, which keeps detailed files and reports on the fund, all of which are available to the public.

B The BEST source of information related to a mutual ufnd wll be the fund's prospectus, which will include investment strategy, management style/structure, sales load and fee strucuture, an other relevant infomration such as risk factors, etc. Accounting documents may be helpful but would not be the best source of information for an investor, becasue show performance of the investment company but do not give information such as investment objective of the fund, risks, fees and sales loads, or managment style. The investment manager may be a good source for the prospectus, but would NOT have a specific listing of all invesmtnes in the fund at any given pint in time during the trading day that would be avaiable to investors or the public. The SECmay also be a good source for the prospectus, but would not provide access to all files and reports to the public.

An investor decides to exchange her fund for another fund within the same family of funds. As a result, she realizes a gain. How is this gain treated for tax purposes? A) As long as the fund falls within the same family of funds, the investor need not report the gain. B) Regardless of whether the fund falls within the same family of funds or not, the investor must report the income from the gain for the year during which the gain was realized. C) As long as the investor completes Form 1035, the gain does not need to be reported. D) If the investor takes the gain as a distribution of cash, then the investor can report the gain as a dividend.

B The IRS does not consider the switch to be a conversion, it considers it to be a sale and purchase and would therfore be taxable in the year the exchange occurred. The gain is reportated as a capital gain.

Which of the following is true when the holder of put decides to exercise the put and the broker-dealer sends the exercise notice to the OCC Options Clearing Corporation? The OCC would A) forward the exercise notice on a first in first out basis to another clearing member who has a short position that satisfies the exercise notice. B) randomly choose another clearing member who is short that series to satisfy the exercise notice C) assign the exercise notice to the clearing member who wrote the option D) pay the money required to satisfy the exercise price directly to the person who exercised the option

B The OCC will randomly select another clearing member frim who is short that same series to satisfy the exercise notice.

The Securities Act of 1933 regulates A) the exchange markets. B) registration of securities before the securities are sold to the public. C) issuance of municipal bonds. D) the fees charged by mutual fund companies.

B The Securities Act of 1933 requires registration of securities prior to public sale.

Broker-dealers charge their margin customers interest on the debit balances held in the customers' margin accounts. What is the interest rate called that is the basis for margin rates charged to customers? A) The current federal funds rate B) The current broker call rate C) The discount rate established by the FED D) The going prime rate found in the open market

B The rate that margin customers pay on debit balances in their margin accounts is based on the broker call rate.

When a registered representative is determining suitability for a customer, all of the following are included in this determination EXCEPT the A) customer's net worth B) historic performance of a fund C) customer's risk tolerance D) customer's retirement or education goals

B The suitability rules are also known as the "know your customer" rules. Suitablility relates to the customer, not to the past perfomance of prospective fund.

n terms of common stock and the securities industry, which of the following BEST describes the term "proxy"? A) A document allowing discretionary trading in a customer's account B) An authorization related to voting privileges allowing absentee voting for shareholders or voting on behalf of shareholders by a broker-dealer firm C) An introducing broker that does not have clearing capabilities, so the firm clears all transactions through another firm called a clearing firm D) An abbreviated word used to describe a quotation that is approximate or is not "firm"

B The term "proxy" in relation to common stock and the securities industry is typically used in reference to voing privileges.When a shareholder does not attend an annual shareholders meeting, the shareholder can typicallyvote by proxy, a form of absentee voting. Proxy is also used to describe a power of attorney that shareholders can give to their borker-dealer firm in relation to voiting on behalf of the shareholders whe nit comes to important matters usch as the board of directors of a corporation, stock splits, etc. A discretionary authorization would be what lalows discretionary tradinng in a customer's account. Proxy is not used in relation to introducing and clearing firms. quotes that are not firm are not labelled as "proxy" but would be referred to as "subject" quotes.

Which of the following indicates if the yield of a zero-coupon bond is currently trading at a premium or at a discount to its compound accreted value? A) Original dollar price B) Original yield C) Maturity date D) Dated date

B To determine if a zero coupon bond is trading at a premium or discount to its accreted value you would always have to work from its original yield.

You are comparing two bond issues. The bonds have the same coupon rate, face value, and maturity date. One is labeled high quality and the other is labeled low quality. Which of the following would you expect of the high quality issue in comparison to the lower quality issue? A) Lower market value B) Higher market value C) Higher price volatility D) Higher yield

B When a bond is rated higher than similar bonds, one can expect taht bond's market price to be higher and its yield to be lower. This is due to the fact that the bond is a safer investment. High quality bonds typically have lower pricce voatility in compariosn to lwoer quallity bonds.

The exercise price of a listed equity option would be adjusted for all of the following EXCEPT? A) a 2:1 stock split B) dividends paid in cash C) rights issued on common stock D) dividends paid in stock

B When a cash dividend is paid on common stock, the exercise price on options is NOT adjusted sicne there is no chagne in the number of shares that the customer will own or that the option will represent. All of the other choices represent a change in the number of shares that will be owned by the investor or holder of the option.

When a registered person with a member firm participates in outside private securities transactions without obtaining approval of the firm, it is referred to as A) Market Manipulation B) Selling Away C) Churning D) Selling Short

B When a registered person with a member firm participates in outside private securitiese transactions without obtaining approval of the firm, it is referred to as "selling away" which is a violation of FINRA rules (i.e. selling products not approved by the brokerage firm)

When existing shareholders are given the opportunity to subscribe to additional shares that are offered by the corporation, this is called a(n) A) secondary offering B) preemptive rights offering C) equity option D) stock dividend

B When existing shareholders are given the right to subscribe to additional shares being offered by the company before the public is allowed to purchase the shares, it is known as a preemptive rights offering.

When a 529 Education Savings Plan is set up, the withdrawals are controlled by which of the following? A) The Plan Sponsor B) The Account owner C) The Beneficiary D) The Trustee

B Withdrawals are controlled by the owner of the 529 plan.

Which of the following is NOT a function performed by the designated market maker of a stock? A) Each day, the designated market maker opens the market in their respective security. B) The designated market maker ensures that a fair and orderly market exists and is maintained in their respective security. C) "Not-Held" orders are taken and processed by the designated market maker. D) The "designated market maker's book" is updated and maintained by the designated market maker.

C "Not-Held" ordres are handled by "floor brokers," not by the designated market maker. ALl of the other functions and duties are those of a designated market maker.

Which of the following activities would not be done by a designated market maker on the floor of an Exchange? A) handling the execution of odd lot orders B) recording open orders in the book C) handling the distribution of new issues D) trading for their own account

C A designated market maker would execute odd loat orders (but not report the mto the tape), record open (GTC) orders in the book and trade for their own account but would never be invovled in the distribution of new issues or be part of an underwirting syndicate.

A "hedge fund" is a form of investment that involves: A) investment in landscaping companies. B) pooled investment by multiple investors where no specific criteria must be met to participate. C) pooled investment by multiple investors where, due to high levels of risk, only high net worth investors are permitted to participate. D) investment in securities on both the upside and downside of the market with the goal of limiting risk and protecting an investor's assets.

C A hedge fund is a form of pooled investments that is considered to be high risk. Hedge funds use derivatives such as options and engage in short selling in order to obtain high rates of return. Because of the high level of risk involved, only high net worth investors are permitted to participate. Pooled invesments that have no specific criteria needed to particiapate would likely be investment companies of various type (mutual funds). The "hedge" in hedge fund does not apply to landscaping. Also, "hedge fudn" is not a specfici reference to the investment strategy of "hedging" investments (being on both sides of the market), though historically, hedge funds engage in more short selling as a means of protecting agianst losses. Hedge funds have a goal of high return, not limiation of risk and protection of investor assets.

According to anti-money laundering regulations, which of the following must be reported to federal authorities? A) All personal checks B) Wire transfers of $5000 or more C) Cash deposits of more than $10,000 D) Cash and wire transfer combined that total $7000

C All cash deposits of more than $10,000 must be reported to the IRS ( Financial Crimes Enforcement Network)

An individual receives her paycheck and pays for her rent and groceries for the month. After all the essential needs are paid for the remaining income is called A) disposable income B) gross income C) discretionary income D) residual income

C An individual's income from employment before taxes are removed is known as their gross income. Taxable income referes to total income less qualified, tax-deferred contribtuions to retirement plans, etc. After taxes are removed, this is referred to as the individual's net income. Net income is also known as disposable income, which can be spent on essential, non-essentials, or it can be saved or invested Discretionary income refers to money which can be spent after essentials are paid. It is a major economic indicator.

obbie purchased 100 shares of ABC common stock several years ago. Which of the following rights does Bobbie have by owning common stock that preferred stock holders do not have? The right to A) sell his shares. B) receive dividends. C) vote on important matters such as stock splits. D) inspect certain books of the corporation.

C Both common and preferred stockholders ahve the right to sell their shares, receive dividends, and inspect certain books of the corporation. Only common stockholders are given the right to vote on important matters such as stock splits and elections for members of the Board of Directors.

Which of the following facts is provided in a call provision of a callable bond? A) Maturity date B) The bond's duration C) Callable date and the price at which the bond will be called D) Current yield of the bond

C Call provisions allow an issuer to call bonds in if a reduced cost of borrowing is available (e.g., call high interest reate bonds to issue low interest rate bonds). The call provision in a bond's indentrue provides the callable date and the call price. The callable date is the date from which the bonds may be called by the issuer. Prior to this date the bodns may not bcalled during the "call protection" period. On callable bonds, the price at which the bonds are called will be listed. usually this is at a lsigh premium to par (over $1,000).

An investor who is interested in purchasing Class A mutual fund shares would have which of the following characteristics? A) A small amount of money to invest B) A short-term time horizon C) A moderate to large amount of money to invest D) Speculation as an investment objective

C Class A mutual fund shares typically have a fron-end sales load and sales charge breakpoints but gernerally have lower annual 12b-1 fees. Therefore, they are well sutied fro investors with a moderate to large amount of money to inveset becasue the sales charge breakpoints would reduce the ales charge significantly for investors with a long-term investment horizzon. The various mutual fund hsare classes are defined in Rule 18f-3 under the Investment Company Act of 1940. For liquidity reasons, speculators and investors with short-term time horizons would be best served by invesments that do not contain a front-end sales load and that ca nbe traded throughout the trading day.

A broker should disclose all of the following characteristics of a Section 529 Prepaid Tuition Plan to clients who are the parents of a college bound child and who are trying to make advance provision for the costs of college EXCEPT: A) These plans do not have investment risk B) These plans do provide a hedge against increases in tuition costs C) Contributions to these plans are tax deductible for federal income tax purposes. D) These plans typically charge enrollment and administrative fees

C Contributions to Section 529 Plans are NOT tax deductible for federal income tax purposes. All of the other quesiton choices are correct and should be disclosed to the clients.

A customer of a RR wants to give the RR two tickets to a local musical worth $150. Which of the following is true? A) The tickets may be accepted because they are from a satisfied customer. B) The tickets may be accepted after the prior written approval of FINRA. C) The tickets may not be accepted because they exceed the $100 limit. D) The tickets may not be accepted regardless of the value of the tickets.

C FINRA Rule 3220 restricts gifts to influence or reward employees of others to $100 per person per year. THe restriction includes gifts to and from customers.

The Alternative Minimum Tax (AMT) may be applied to shareholders of a mutual fund that has which of the following securities contained within? A) U.S. Treasury Bills B) Convertible bonds C) Municipal bonds issued for private industry purposes D) Investments in blue chip securities

C For individuals, the AMT is computed by adding tax preference items to taxable income. Among those items is interest earned on private activity municipal bonds.

A 45-year-old customer leaves his employer and takes payout on their 401(k) Plan assets with the intent to roll the plan into a Traditional IRA. The client fails to do so within the required time period. The client will have to pay A) a 10% penalty on the amount paid out with no other tax consequences. B) ordinary income tax on the amount paid out with no other tax consequences. C) both a 10% penalty on the amount paid out and ordinary income tax on the amount paid out. D) no taxes associated with the 401(k) Plan payout, because he left his employer.

C If assets are withdrawn or paid out of a retirement product such as a 401(k) or Traditional IRA prior to the plan holder reachign 59 1/2 and no exceptions apply, the plan holder will have to pay a 10% penalty for taking early distributions and will also owe orinary income taxes on the toal amount paid out because of the pre-tax status of contributions and earnings.

In order for a firm to effectively enforce an anti-money laundering program, which of the following would be most important A) Not allowing cash deposits B) Filing a SAR report on time C) Knowing its customers D) Reviewing accounts for churning

C Knowing its Customers would be the most important of all choices offered.

Regarding FINRA rules, if an RR will be paid to find investors for a limited partnership that he is affiliated with, which of the following is TRUE? A) The member firm must contact the limited partnership to notify it that the RR is employed by the member firm. B) No action is needed unless the RR is a limited partner. C) If the member firm approves of this activity it must record it and supervise it. D) If approved, FINRA has 10 business days to review the activity.

C RRs must inform their member firms of any "private securities transactions" done away from the busienss activity of the broker-dealer befroe engaging in such activity. if the member approves such activity, it must maintain records and supervise such activity.

Mr. Smith has been considering the purchase of a mutual fund and has decided he wants to buy $8,000 of the fund but only has $4,000 to invest now. He asks you, his registered representative, to lend him the other $4,000 which he will repay in 2 months. Which of the following is correct about this situation? A) The rep may lend the customer the funds as long as the agreement is in writing. B) The rep should establish a margin account for the customer and buy the fund shares on margin. C) The rep must deny the customer's request for a loan. D) The rep may lend the customer funds with the firm's prior approval.

C Reps may not make loans to customers and could not establish a margin account since mutual funds may not be purchased on margin.

When a company does a Rights Offering, the rights are A) sold to the general public. B) sold to only existing shareholders. C) only given to existing shareholders, proportionately to shares held. D) given to the public on a first come, first serve basis.

C Right are a short-term privilege granted by a coporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a proice that is lower than the public offering price before the public is allowed to purchase the new shares.Rights aredistributed to the existing shareholders at no cost.

The Statement of Additional Information must be delivered A) within 10 days of opening a new customer account B) when the prospectus is sent to clients or prospective clients C) at the request of a client or prospective client D) at least once a year to each client

C Statements of Additional Information must be delivered upon request to ANY investor, prospective or existing, who requests it.

Which of the following entities provides a physical and electronic location where listed options transactions are performed during trading hours in the U.S.? A) The Options Clearing Corporation (OCC) B) The Securities and Exchange Commission (SEC) C) The Chicago Board Options Exchange (CBOE) D) The Financial Industry Regulatory Authority (FINRA)

C The Chicago Board Options Exchange (CBOE) is the largest U.S. options exchange facilitating the majority of listed option transactions during trading hours in the U.S. The Options Clearing corporation (OCC) is responsible for accepting, guaranteeing, and cleaing the exercise of listed option contracts and the majority of option activity in the U.S. The Securities Exchange Commission (SEC) is a regulatory commission for financial purposes in the U.S, while the Financial Industry Regulartory Authority (FINRA) is a self-regulatory organization charged with the majority of regularory duties within the U.S.

Which of the following entities or systems is used to settle the majority of equity transactions, corporate bond transactions, and municipal bond transactions in the United States? A) The New York Stock Exchange (NYSE) B) The National Association of Securities Dealers Automated Quotations (NASDAQ) C) The Continuous Net Settlement (CNS) System offered by the Depository Trust & Clearing Corporation (DTCC) D) The Order Audit Trail System (OATS), established by the Financial Industry Regulatory Authority (FINRA)

C The DTCC's CNS System acts as the central counterparty for clearance and settlement of virtually all broker-to-broker equity, corporate, and municipal bond/UIT trading in the United States. The NYSE is a physical exchange where listed securities transactions take place. NASDAQ is an electronic exchange where transactions take place. FINRA's OATS system is used to provide a means of recreating the chain of events tied to orders that are received and execute by member firms.

You are an RR and one of your clients informs you that they will now be participating in a pension plan offered at work. The plan takes the average salary of the employee over the last three years of service and pays 50% of that figure. Which of the following best describes this type of plan? A) The client has an annuity plan that is tax-deferred. B) The client has a defined contribution plan. C) The client has a defined benefit plan. D) The client has a deferred compensation plan.

C The description of the plan in the question falls within the parameters of a defined-benefit plan. In this type of plan, the terms and benefits ofth plan are defined. An example of such a plan would be after 30 years of service, an employee can retire collecting 50% of their average salary ove the last 3 years of service.

An "exchange privilege" offered by a group of mutual funds allows the investor to A) sell their shares on the New York Stock Exchange. B) exchange shares of an open-end fund for an ETF. C) exchange shares of one fund in the group for another different fund in the group at a reduced or no sales charge. D) withdraw cash from investments in fund shares without losing the option of continuing to reinvest dividends and capital gains.

C The exhange privilege allows mutual fund shareholders to switch funds within the same fund family as market conditions chagne. Ivnestors may do so at a reduced sales charge or with no sales charges at all. There may be a small administrative fee for the switch. There is usually a limit on how frequently a shareholder can switch in one year.

Greg has been investing in stocks for years and now decides to buy some Treasury Securities in the secondary market. He enters an order to buy 10 US T-Bonds on Friday, September 15th. When can Greg expect settlement? A) Wednesday, September 20th, trade date plus three business days B) Tuesday, September 19th, trade date plus two business days C) Monday, September 18th, trade date plus one business day D) Friday, September 15th, for same-day settlement

C US Government Securities trading in the SECONDARY market will settle T+1 business day. In this case, T+1 puts settlement date on Monday, September 18th due to the weekend. This differs from settlement of common stocks in the secondary market, which normally settle T+2. Settlement of US Government in the PRIMARY market from auction is T+3.

A customer opens an account at a member firm and gives the minimum amount of information necessary to open the account, refusing to answer several questions. The customer deposits multiple checks into the account over a period of a month, all of which are just below $5,000. Shortly thereafter, the customer liquidates the majority of the assets in the account with checks drawn over a period of several days, all of which are below $5,000. An Operations Professional or Registered Representative who notices this behavior should A) file a Currency Transaction Report (CTR) immediately if the various transfers exceeded $10,000 and report the customer to FINRA's Whistleblower Department. B) completely freeze the customer's account so that the customer cannot deposit, withdraw, or invest any assets. C) file a Suspicious Activity Report (SAR), even though the amounts that are deposited or withdrawn never exceeded $5,000 in any one transaction. D) personally take possession of the customer's assets into the firm's error account, since opening an account for this customer was clearly an error in judgement.

C With the circumstances listed, the OP or RR handling this account has adequate justification to file a Suspicious Activity Report (SAR). The trasnfers of funds all appear to be attempts to avoid reporting limitations and the customer has behaved suspiciously. The CTR would be appropriate for cash transaction, but that is not specified and reporting of this customer would not take place to FINRA's Whistleblower Department, as that department would be more focused on member firm issues. Completely freezing the account or putting the customers assets into the firm's error account would not be approprriate in this scenario, as the situation has not yet been escalted to authoriities and no course of action has yet been specified. A firm's error account is for errors in trades, not in opening/closing accounts.

All of the following are true about a registration statement EXCEPT: A) It is filed with the SEC by the managing underwriter on behalf of the issuer. B) It describes the issuer's business. C) It describes the intended use of the proceeds. D) A copy is sent to prospective investors.

D A registration statement is filed with the SEC by the managing underwriter on behlaf of the issuer. It describes the issuer's busienss and the use of the proceeds. It describes the issuer's business and the use of the proceeds. It is not sent to investors. Investors get a prospecturs once the registration is "effective."

All of the securities listed below can be purchased on margin in a margin account EXCEPT? A) U.S. Government securities B) Listed securities C) NASDAQ securities D) New Issues

D Any securities sold with a prospectus CANNOT be bought on margin, therefore new issues must be paid for in full. U.S. Government securiites, Listed securities, and NASDAQ securities can be pruchased on margin in a customer's margin account. Securities purchased on margin are prucshased on credit from a broker-dealer and carry certain restrictions.

Which of the following instruments/asset classes would generally be considered to be the least liquid? A) Over the counter stock B) Listed stock C) General obligation municipal bonds D) Direct participation program units

D Direct participation program (i.e. limited parnership) units can be difficult to sell because there is not an active secondary market for limited partneryships and becasue the lmited partners (the investors) gernarlly need the approval of the gerenal partners before they can sell their units.

The Investment Company Act of 1940 requires that certain transactions use "forward pricing" (the valuation of mutual fund share prices as of the next computation). Which of the following transactions does NOT require "forward pricing"? A) Shares are purchased directly from the principal underwriter by individual investors. B) Shares are sold on behalf of an investor by the investor's broker-dealer through a wire order. C) Shares are redeemed directly to the fund by a customer. D) ETF shares are purchased by a customer in the secondary market.

D Forward pricing is required for all purcahses and redemptions of mutual fund shares. However, investors who purchase ETFs in the secondary market pay the market price at the time of the purchase. Forward priceing is not used.

Foreign exchange rates are determined in which of the following markets? A) They are determined in the equity securities market. B) They are determined in the primary market. C) They are determined in the fourth market. D) They are determined in the interbank market.

D Of the options listed, the best hoice is the interbank market. The interbank market is a system where currencies are traded between certain banks and financial instituions. Though these markets may not "determinie" the exact exchagne rates they do indicate the supply and demand of many currencies.

All of the following are required prior to when an employee of a member firm wants to open an investment account at another member firm EXCEPT: A) The employee must notify in writing the employing member firm. B) The employing firm must advise the employee of approval or disapproval of the request. C) The employee must notify in writing the executing firm before the account is opened. D) Duplicate confirms and statements must be provided to the employing firm.

D Once the account is approved no further notification is required UNLESS, after the approval, the employing member firm requests duplicate copies of statemnt and confirms from the carrying member firm.

All of the following documentation is required to open a customer margin account for the president of a bank EXCEPT: A) a new account report form B) a margin agreement C) a hypothecation agreement D) authorization from the bank's board of directors

D Opening any customer account requires a New Account Report form. Opening a margin account also requires a margin agreement and a hypothecation agreement. The president ofa bank does not need authorization from the bank's board of directors to open the account.

Which of the following bond offerings would be required to have a trust indenture under the Trust Indenture Act of 1939? A) U.S. Treasury Bond B) airport authority revenue bond C) general obligation bond D) mortgage bond

D Since the Trust Indenture Act of 1939 is applicable onlny to corporate bonds, the mortgage bonds would bethe only bonds required to have a trust indenture.

Which of the following would determine the current value of a variable annuity's accumulation units? A) The number of purchased units multiplied by the assumed interest rate of the annuity B) The holder's life expectancy determines the value C) The holder's anticipated date of annuitization D) The underlying securities' value as seen in the variable annuity's separate account

D The current value of an accumulation unit of a variable annuity is always determined from what the value of the underlying securities in the annuity's separate account.

Reuben has a cash account and really likes ABC Common Stock. He enters an order to buy 100 shares of ABC at the market and receives an execution at $50/share. A couple of hours later, he realizes that he does not have the free capital on hand in his cash account or at his bank to pay the $5,000 for the stock. In that couple of hours, the stock has appreciated to $55/share and realizing his mistake, Reuben enters an order to sell. Because he purchased and sold on the same day, Reuben assumes that he will not have to deposit the $5,000. Which of the following is TRUE? A) Because Reuben failed to pay for the initial purchase, all securities in Reuben's account will be liquidated and his account will be closed immediately. B) Under Regulation T, Reuben will receive a margin call related to this transaction and will have to deposit a minimum of 25% of the market price of the stock at the time of purchase. C) Because the transactions took place on the same day and Reuben was able to realize a profit, he will not have to deposit funds related to this purchase and he will keep the $500 profit less commissions. D) Reuben's assumption that he does not have to deposit funds related to his purchase is incorrect and he is free-riding, which will lead to his account being frozen and additional restrictions on his account for 90 days.

D The sequence of events that are described are an example of "free-riding", where a custoemrs with a cash account buys securities, does not deposit funds, then sells the securities prior to settlement. This is a prohibitied proctice. Under Regulation T, this is the equivalent of the customer failing to deposit funds even when the position had not yet been closed. This requires a "freeze" on the customer's accoount for 90 days, during which the cusotmer must have cash on hand as of trade date in order to make purcahses in the account (customer does not get the T+2, regular-eay settlement time period). Reuben's account does not need to be liquidated and closed, but will be frozen. Minimum maintenacne requirements apply to margin account and do not apply to cash accounts.

All of the following information is required from an individual customer when completing a new account report form except: A) the customer's residential street address B) the customer's employer's name and address C) verification of the identity of the customer D) the source of funds the customer deposits when opening the account

D The source of funds used to open the account is not required. The other information is required.

The calculation of the contingent deferred sales load upon the redemption of a mutual fund is based on A) the NAV at the time the fund shares are redeemed B) the NAV at the time the fund shares were purchased C) either the NAV at the time of purchase or the NAV at the time of redemption, whichever is greater D) a percentage of either the NAV at the time of purchase or the NAV at the time of redemption, whichever is less, and generally the fee may not exceed 2%

D Typically, a fund calculates the amount of a back end sales load based on the lesser of the value of the shareholder's initial investment or the value of the shareholder's invesment at redemption.