SIE Prep: Unit 1 Checkpoint Exam
Which of the following types of broker-dealer would most likely have correspondent firms? A) Self-clearing B) Fully disclosed C) Market maker D) Introducing
A. A self-clearing (or carrying) firm holds funds and securities of the fully disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Those firms for whom the carrying firm performs those services are known as its correspondents. Reference: 1.1.4 in the License Exam Manual
In most cases, the majority of private placements are sold to A) institutional investors B) general public investors C) individuals who meet the definition of accredited investor D) investment bankers
A. Although private placement securities may be sold to small groups of wealthy individuals who meet certain net worth and income criteria (accredited investors), by far the greatest volume is sold to institutional investors. Reference: 1.4.2 in the License Exam Manual
An individual is defined by the SEC as an accredited investor if the individual has a net worth of A) Greater than $1 million, or has had an annual income of greater than $200,000 in each of the 2 most recent years B) $10 million or more, or has had an annual income of $100,000 or more in each of the 5 most recent years C) $5 million or more, or has had an annual income of $500,000 or more in each of the 2 most recent years D) $3 million or more, or has had an annual income of $200,000 or more in each of the 5 most recent years
A. By definition, an accredited investor is one who has a net worth of over $1 million (excluding net equity in a primary residence), or has had an annual income of more than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching the same income level in the current year. Note that for joint tax filers, the minimum income level is over $300,000. Reference: 1.1.4 in the License Exam Manual
Producers would generally report rising inventories during which period of the business cycle? A) Contraction B) Expansion C) Peak D) Recovery
A. Downturns in the business cycle (a contraction) tend to be characterized by rising inventories (a sign of slackening consumer demand). During expansion (recovery is a synonym) and peak, goods are usually moving as fast as they can be produced with little chance of buildup in inventories. Reference: 1.3.2 in the License Exam Manual
Which of the following transactions represents the greatest potential risk to an investment banker? A) A firm commitment offering B) A stock split C) A best efforts IPO D) A spin-off
A. In a firm commitment offering the underwriter acts as principal and assumes the risk of bringing a new securities issue to market. The underwriter buys shares from the issuer and resells the securities to the public at a higher price - the public offering price (POP) and earns this price differential (spread) for its efforts. If the shares cannot be sold, the underwriter must place the securities into its inventory and runs the risk of losing money should the position fall in value. Best efforts deals are closed by collecting client funds into an escrow account so no underwriter capital is at risk in these types of offerings. A stock split and spinoff do not involve an underwriter placing any funds at risk. Reference: 1.4.2 in the License Exam Manual
A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called A) a clearing agency B) a broker-dealer C) a depository D) a transfer agent
A. This is the function of a clearing agency. Although there are some broker-dealers that do act as clearing agents, being a broker-dealer doesn't always include providing the services of a clearing agent. The broker-dealer would need to meet all of the requirements of being a clearing agent. Reference: 1.1.4 in the License Exam Manual
Most economists would agree that rising employment would be found during periods of A) stagnation B) inflation C) deflation D) stagflation
B. During inflationary periods, there is generally a rising demand for goods and services. This will have the effect of creating more employment. Conversely, when the economy slows down, employment generally falls (claims for unemployment benefits rise). Reference: 1.3.2 in the License Exam Manual
An investment banker primarily engages in which of the following activities? A) Offering high net worth investors private banking services B) Helping issuers to raise capital through securities issuances C) Helping banks find appropriate investments for excess reserves D) Assisting wealthy individuals manage their investment portfolios
B. Investment bankers help issuers by marketing securities to potential investors. The function of the investment banker (also known as an underwriter) is to help the issuer to structure capital raises and at times, form syndicates with other underwriters to facilitate this money raising process. Reference: 1.4.1 in the License Exam Manual
The SEC has established rules regarding delivery of a prospectus when a secondary market transaction occurs after the effective date. Which of the following statements comply with those rules for initial (IPO) and additional (APO) public offerings? An IPO of a stock to be listed on the NYSE requires delivery for a period of 25 days. An IPO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. An APO of a stock listed on the NYSE requires delivery for a period of 25 days. An APO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. A) II and III B) I and IV C) III and IV D) I and II
B. The prospectus delivery rules are: IPO for listed or Nasdaq—25 days; APO for listed or Nasdaq—none; IPO for non-Nasdaq—90 days; APO for non-Nasdaq—40 days. Reference: 1.4.4 in the License Exam Manual
A corporation seeking to raise funds in order to expand its manufacturing capacity would do so in A) the secondary market B) the funding market C) the capital market D) the currency market
C Raising new capital is generally accomplished through the issuance of stock (equity capital) or bonds (debt capital). This is done in the capital market. When an issuer offers stock and the proceeds from the sale are added to the company's capital, it is called a primary offering. By contrast, a secondary offering is one in which one or more shareholders in the corporation sell all or a portion of their equity holdings to the public. The proceeds of a secondary offering are paid to the selling shareholder(s), not the company. Reference: 1.2.1 in the License Exam Manual
GEMCO Oil and Gas, listed on the NYSE, wishing to sell up to $300 million of convertible debt as market conditions permit, files a shelf registration statement with the SEC. Which of the following statements are TRUE? - For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale. - The registration statement is effective upon completion of the cooling-off period. - Shelf registration allows this issuer to sell portions of a registered shelf offering over a 2-year period without having to re-register the security. - Shelf registration allows this issuer to sell portions of a registered shelf offering over a 3-year period without having to re-register the security. A) I and III B) II and IV C) I and IV D) II and III
C. Section 415 of the Securities Act of 1933 allows publicly traded issuers to register an offering for sale at times to be determined by the issuer. In essence, the issuer is taking the securities "off the shelf" and selling them when needed, hence the name, shelf offering. No new registration is required for a period of 2 years, but, a supplemental prospectus must be filed with the SEC before each sale. A Well Known Seasoned Issuer (WKSI) has a three year shelf offering. Reference: 1.4.3 in the License Exam Manual
The Securities Exchange Act of 1934 allows for the creation of self-regulatory organizations (SROs) to write and in some instances enforce compliance by its member firms and persons associated with its member firms. Which of the following is NOT an SRO registered with the Securities Exchange Commission (SEC)? A) FINRA B) The CBOE C) The DTC D) The MSRB
C. The Depository Trust Company (DTC) performs the functions of a Central Securities Depositary. It does not deal with regulation or enforcement of securities rules. Exchanges such as the CBOE, FINRA, and the MSRB are all self-regulatory organizations (SROs). Note that while the MSRB is an SRO it is not empowered to enforce the rules it writes. Reference: 1.1.2 in the License Exam Manual
The enforcement of MSRB rules upon broker-dealers is performed by A) NYSE B) MSRB C) FINRA D) OCC
C. The MSRB has rulemaking, but not enforcement capability. The enforcement of their rules on broker-dealers has been delegated to FINRBank regulatory agencies, such as the FRB, enforce the MSRB rules on banks who act as municipal dealers. Reference: 1.1.2 in the License Exam Manual
Which one of the following is NOT a tool used by the Federal Reserve Board (FRB) to impact the money supply? A) Changing the reserve requirements B) Changing the discount rate C) Changing the prime rate D) Open market operations of the FOMC
C. The prime rate is set by money-center banks, not the FRB. The remaining 3 answer choices are the tools available to the FRB to affect the money supply. Reference: 1.3.1 in the License Exam Manual
It would be reasonable to expect an increase in exports from the United States if the dollar strengthened against the euro the yen strengthened against the dollar the Swiss franc weakened against the dollar the dollar weakened against the British pound A) I and IV B) I and III C) II and IV D) II and III
C. U.S. exports should increase when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar. Reference: 1.3.3 in the License Exam Manual
First Amalgamated Bank of Buffalo, a large commercial bank, is a member of the Federal Reserve System. Should the bank need to increase its reserves, it could borrow from the FRB and pay the discount rate borrow from the FRB and pay the federal funds rate borrow from another member bank and pay the discount rate borrow from another member bank and pay the federal funds rate A) II and IV B) I and III C) I and IV D) II and III
C. When a bank needs to borrow money to increase its reserves it can borrow from the Federal Reserve Bank, or it can borrow from another member bank like itself. When borrowing from the FRB, the banks pay the discount rate. When borrowing from another member bank, the banks pay the federal funds rate. Reference: 1.3.1 in the License Exam Manual
A broker-dealer that concentrated its business efforts on proprietary trading would most likely be functioning as A) an investment banker B) an investment adviser C) a market maker D) an underwriter
C. When a broker-dealer buys and sells securities for its own account as the major portion of its business model (proprietary trading), it is functioning primarily as a market maker (making markets in those securities). Investment banking and underwriting both primarily involve assisting issuers with bringing new securities issues to public investors. Investment advisers sell advice, they don't trade securities. Reference: 1.1.4 in the License Exam Manual
ABC Corporation has filed a registration statement with the SEC for the sale of 1 million shares of common stock. This will be the first public offering for ABC. Twelve days into the cooling-off period, ABC receives a deficiency letter from the SEC requesting further information. Five days later, ABC submits the required corrections. Assuming no other problems, this issue should become effective in A) 15 days B) 3 days C) 8 days D) 20 days
C. When the issuer submits the corrections necessary to satisfy the deficiency letter, the 20-day cooling-off period picks up where it left off; in this case, from 12 days. Reference: 1.4.4 in the License Exam Manual
An institutional customer, such as a hedge fund, utilizes the services of a broker-dealer who provides custody of securities as well as other back-office functions while allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders. This account would be known as A) a clearing account B) a self-clearing account C) a fully disclosed account D) a prime account
D. A BD that provides custody of securities and other back-office functions but allows the customer to maintain relationships with other BDs who will provide execution services is known as a prime BD. The account, known as a prime account, is maintained at the prime broker rather than with any executing brokers. Reference: 1.1.4 in the License Exam Manual
All of the following would decrease the U.S. balance of payments deficit EXCEPT A) an increase in exports of domestic goods from the United States B) a decrease in imports of foreign goods into the United States C) a decrease in dividend payments by U.S. companies to foreign investors D) a decrease in purchases of U.S. securities by foreign investors
D. Anything that will bring foreign money to the United States will decrease the balance of payments. Foreign investors pulling their money out of the United States or investing less in the United States will increase the U.S. deficit. Reference: 1.3.3 in the License Exam Manual
With regards to fiscal policy, it would be CORRECT to state that fiscal policy is considered the most efficient means to solve short-term economic problems fiscal policy is not considered the most efficient means to solve short-term economic problems fiscal policy refers to governmental budget decisions enacted by our president and Congress fiscal policy refers to governmental budget decisions enacted by our president and the cabinet A) I and IV B) I and III C) II and IV D) II and III
D. Because the political process determines fiscal policy, it takes time for conditions and solutions to be identified and implemented. Therefore, it is not considered an efficient way to solve short-term economic problems. Fiscal policy is the responsibility of our president and the Congress. Reference: 1.3.1 in the License Exam Manual
Both exempt and nonexempt securities have full disclosure documents available to the investing public so that an informed investment decision can be made. The document associated with exempt securities would be A) a prospectus or offering circular B) an official statement or registration statement C) a prospectus or disclosure document D) an official statement or offering circular
D. Exempt securities are not required to be registered with the SEC (are exempt) and therefore have no prospectus requirement. They do have full disclosure documents, however, and depending on the particular type of exemption, these are official statements or offering circulars. Nonexempt securities, those required to register with the SEC (are not exempt), are required to have a prospectus to serve as the full disclosure document. Reference: 1.4.5 in the License Exam Manual
The ABC Chemical Corporation wishes to advertise its upcoming offering of common stock in a tombstone advertisement that they, the issuer, will place. When placing the tombstone advertisement, which of the following would be least likely to appear? A) The expected price range of the offering B) The name of the issuer C) The total number of shares being offered D) The names of the investment bankers underwriting the issue
D. In most cases, the names of the firms underwriting the issue only appear in the tombstone ad when they, rather than the issuer, have placed the ad. In this instance with the tombstone advertisement placed by the issuer themselves, the names of the underwriters would not likely appear. Reference: 1.4.3 in the License Exam Manual
The Federal Reserve is concerned that the economy is slowing. Which of the following actions would the Fed most likely engage in? A) Double the reserve requirements for member banks B) Engage in open market sales of T-Bills C) Raise the margin requirements under Reg. T D) Pursue an easy money policy to lower interest rates
D. Monetary policy is implemented by the FRB (Federal Reserve Bank). Monetary policy attempts to control the supply of money to influence the level of interest rates which, in turn, will either stimulate or dampen the U.S. economy. If the FRB believes the economy is sluggish and needs to be stimulated, it will attempt to lower interest rates by pursuing an easy money policy. Lower rates are designed to encourage borrowing in an effort to stimulate growth. Raising the margin rate or reserve requirements are tightening actions which will dampen economic activity. Selling T-Bills will reduce the money supply and raise rates which is also a tightening action. Reference: 1.3.1 in the License Exam Manual
It is generally agreed that the most volatile interest rate in the U.S. economy is A) the discount rate B) the prime rate C) the call money rate D) the fed funds rate
D. The federal funds rate is the rate the commercial money center banks charge each other for overnight loans of $1 million or more. It is considered a barometer of the direction of short-term interest rates, which fluctuate constantly and can be considered the most volatile rate in the economy. Reference: 1.3.1 in the License Exam Manual
