SIE Simulated Exam 2 (Solutions and answers)
Once a customer account has been opened at a broker-dealer, rules require that updating information on the account record occur no less frequently than once every
36 months. Account updating must occur at least every 36 months thereafter.
Which of the following are fixed at the time a bond is issued?
Nominal yield Coupon, nominal, or stated yield is set at the time of issue and is a fixed percentage of the bond's par value.
A registered representative wants to place advertisements in his daughters youth athletic league quarterly sponsorship booklet. He wants to convey in the weekly bulletin at his church that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is true?
Pre-approval by a principal of the broker-dealer is required. Any piece promoting securities services and/or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be preapproved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications.
In an effort to safeguard customer information which regulation specifies securing desktop and laptop computers and encrypting email?
Regulation S-P Safeguard requirements such as securing desktop and laptop computers and encrypting email to protect customer information is an obligation of financial institutions under Regulation S-P.
An investor purchased and then sold a security eight months later for a gain. This gain
is considered to be a short-term gain, and it will be taxed at a more favorable rate than long-term gains. Positions closed within 12 months or less are considered short term. When a gain is realized, it will be taxed at the same rate as the taxpayer's other ordinary income. By contrast, a long-term capital gain is taxed at a favorable long-term rate.
For investors, changes made to the tax code by the government are known as a form of
legislative risk. Legislative risk results from changes in the law, not regulations. Changes in tax laws are one example.
Carrying firms may not
mix customer funds and securities with their own. Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities.
The seller of a call has
the obligation to sell the stock. The buyer of the call has the right to buy the stock. The seller of the call has the obligation to sell the stock.
Capital markets can be characterized by all of the following except
they are utilized by the public sector only. In capital markets, both public and private sectors sell securities (stocks and bonds) to raise funds to finance both long-and short-term initiatives. Both individuals and institutions can trade securities in these markets.
An investor has purchased Class A mutual fund shares. The net asset value (NAV) per share of the fund is the price the investor
will receive upon redemption of the shares. The NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.
An investor has a cash account with $300,000 in securities and $40,000 in cash. The investor also has a restricted long margin account containing securities with a market value of $220,000 and equity of $60,000. What is the extent of this investor's Securities Investor Protection Corporation (SIPC) coverage?
$400,000 Coverage under SIPC may not exceed $500,000 in cash and securities, of which up to $250,000 may be cash. In the cash account, his coverage is $300,000 in securities plus $40,000 in cash. In the long margin account, the coverage is only the equity, which is $60,000. Total: $300,000 + $40,000 + $60,000 = $400,000. LO 9.d
Your client, Randall Stephens, has been bearish on LMN stock and sold it short several months ago. He now believes the company is in a good position for a turnaround and wants to change his strategy on LMN. What should he do to implement his new strategy?
Buy to close his existing position and open a new long position in the stock Buying to close will eliminate his existing position, but if he now wants to engage in a bullish strategy on LMN, he would need to buy additional shares.
Your broker-dealer executes trades for other broker-dealers and after execution settles those transactions for them. Your firm would be classified as which of the following?
Carrying firm Carrying firms, or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers.
Selling long is equivalent to which of the following?
Selling to close When a customer owns a position and then sells that position, that is referred to as selling long or selling to close.
Which of the following would require the filing of a SAR? Any transaction alone or in aggregate involving at least
$5,000 and appears to serve no business or legal purpose. SARs are required to be filed by the firm if the transaction appears to serve no business or legal purpose, and the transaction involves alone or in aggregate at least $5,000.
If after a registered representative terminates the firm learns of something that should have been reported to the Central Registration Depository, how long does the firm have to make an amendment if that information would cause statutory disqualification?
10 days The rule requires notification within 10 days if the information involves statutory disqualification.
Which of the following is a self-regulatory organization (SRO)?
Financial Industry Regulatory Authority (FINRA) FINRA is considered the primary SRO in the securities industry.
Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle?
Adjustment bonds Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income.
Which of the following is the best description of a limited partnership?
An investment that permits both gains and losses to pass through to the investors Limited partnerships (LPs) are investment opportunities that permit the economic consequences of a business to flow or pass through to investors (limited partners). These would include the consequences of both income received and losses incurred.
If a broker-dealer suspects that a transaction involves funds derived from illegal activity, a suspicious activity report (SAR) would be triggered at what threshold?
At least $5,000 in funds or other assets The threshold for triggering a suspicious activity report (SAR) is at least $5,000 in funds or other assets. Do not confuse this with a Currency Transaction Report (CTR), which is triggered by amounts greater than $10,000.
Which of the following would be associated with loans made to member banks of the Federal Reserve?
Discount rate Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.
Which of the following are true of Roth IRAs but not Traditional IRAs?
Distributions are not required after reaching 72. Because distributions are not taxable on Roth IRAs, there are no required distributions. Roth IRAs have income limits and contributions to Roth IRAs are not deductible. Contributions to IRAs must come from earned income.
Which of the following investment companies terminates business on a predetermined date?
Fixed unit investment trust (UIT) A fixed UIT typically has bonds in its portfolio that mature on a specific date. Before that date, the trust buys and redeems units of beneficial ownership in the portfolio. When the bonds mature and pay off, the trust distributes the remaining interest and principal to the current unit holders and dissolves.
The business cycle is generally viewed as having how many stages?
Four Economists recognize four stages in the business cycle: peak (prosperity), contraction (decline), trough, and expansion (recovery). Because it is a cycle, there is no set starting point or end to the business cycle, but the four stages always occur in the same order.
Firms applying for Financial Industry Regulatory Authority (FINRA) membership are required to I. agree to be in compliance with all federal securities laws. II. pay dues, assessments, and other charges the association levies. III. pass the appropriate qualification exam(s). IV. attend a FINRA annual conference no less frequently that once every three years.
I and II Firms must agree in their membership application that they will comply with all federal securities laws and make payment of dues and assessments when requested. Although qualification exams must be passed by individuals representing the firm, there is nothing requiring the firm itself to do so, nor is attendance at FINRA conferences required.
The bid price represents I. the price the broker-dealer is willing to pay when buying a security. II. the price the customer will pay when buying a security. III. the price a customer will receive when selling a security. IV. the price the broker-dealer will receive when buying a security.
I and III The broker-dealer buys at the bid and sells at the ask. The customer buys at the ask and sells at the bid.
One of the Financial Industry Regulatory Authority (FINRA) Conduct Rules is concerned with private securities transactions. Under that rule, it would be correct to state that I. f the member approves the registered representative participating in a transaction for compensation, it must treat the transaction as if it is being done on its own behalf by entering the transaction on its own books and supervising the associated person during the transaction. II. as long as no compensation to the registered representative is involved, notification to the member is not required. III. sale of a securities product to the registered representative's mother where there is only nominal compensation is not covered under the rule. IV. if the member disapproves of the registered representative's participation in a transaction for compensation, the associated person may not participate in it.
I and IV FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required.
By purchasing shares of stock in a company, investors can benefit from which of the following? I. An increase in the price of the shares II. An increase in price of the company's debt securities III. An increase in the yield of the company's outstanding debt securities IV. The receipt of profits to be distributed
I and IV Stockholders as owners can benefit from an increase in the price of the shares (capital appreciation) and by sharing in earnings through the receipt of dividends (distributed profits). Both are potential benefits, but neither are guaranteed.
Fiscal policy I. is the most efficient means for solving short-term economic issues. II. is not considered the most efficient means to solve short-term economic issues. III. is reflected in the budget decisions enacted by our president and Congress. IV. is reflected in the money supply decisions enacted by the Federal Reserve Board (FRB).
II and III Fiscal policy is reflected in the budget decisions enacted by our president and Congress. This political process takes time for conditions and solutions to be identified and implemented and is therefore not considered the most efficient way to solve short-term economic issues.
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are true? I. Nominal yield is higher than yield to maturity (YTM). II. Current yield is higher than nominal yield. III. Nominal yield is lower than yield to maturity (YTM). IV. Current yield is lower than nominal yield.
II and III The bond is offered with a YTM of 8.25%. Because the YTM is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the YTM.
An investor has opened an individual brokerage account for use in a small business and has given a business partner a power of attorney (POA) over the account. Which of the following persons may have access to the account for trading purposes? I. The attorney who administers to the business's legal needs II. The investor's partner who was given the POA III. The investor who opened the account IV. A secretary at the business, but only in an emergency
II and III The owner of an individual account and anyone who has power of attorney (POA) over the account are the only persons who may have access. This would exclude the business's attorney, secretary, or anyone else not having the POA.
Penny stock rules I. apply to both solicited and unsolicited transactions. II. specify that established customers of the firm need not sign a suitability statement. III. mandate that an account holding penny stocks only need not be provided with a monthly statement. IV. require that prospects be given a copy of a risk disclosure document before their initial penny stock transaction.
II and IV Penny stock rules only apply to solicited transactions, and it is required that the penny stock disclosure document be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.
Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less?
No load No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually. Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (Contingent deferred sales charge, or CDSC). Class A shares charge an upfront load.
As they apply to knowing your customer and making recommendations which of the following are true statements? I. The term investment strategy applies to recommendations to buy and sell only. II. The term investment strategy applies to recommendations to buy, hold and sell. III. Only financial considerations such as income and net worth should be considered when making recommendations. IV. Nonfinancial considerations such as marital status and age should be considered as well as financial considerations when making recommendations.
II and IV The term investment strategy applies to recommendations to invest in, hold, or sell specific securities. When making recommendations, both financial and nonfinancial items in a customer's profile should be considered.
Which of the following would cause a change in the net asset value (NAV) of a mutual fund share? I. Many shares are redeemed. II. Securities in the portfolio are sold for a capital gain. III. The fund pays a small dividend. IV. The market value of the portfolio declines.
III and IV Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged.
Which of the following is a lagging indicator?
Increase in the consumer loans to personal income ratio Changes in the ratio of consumer installment credit to personal income is a lagging indicator. Changes in industrial production and hours worked are coincident indicators. Changes in raw materials orders is a leading indicator.
Which of the following accounts would allow the assets of a single father's account to go directly to his daughter while avoiding probate but not a let her have access while he is alive?
Individual with transfer on death (TOD) Individual with TOD exactly meets his requirements. JTWROS and TIC and individual with POA would all allow the daughter access to the account while he is still alive
Which of the following best describes the size of a quote?
It tells the number of shares the broker-dealer is willing to buy or sell at that price. The size of a quote is the number of shares a dealer has available to trade or is willing to buy at the quoted price.
Which of the following risks is the risk that congress could change the laws and negatively impact a particular company or industry?
Legislative risk Legislative risk occurs because of changes in the law. LO 6.d
Your customer is aware that a corporate action has taken place where the adjustment to the number of shares owned and the stock price will not be standardized but instead is unique to fit the circumstances and terms of the corporate action. Of those listed, which is most likely to be such an action?
Merger or acquisition Adjustments are standardized for corporate actions such as forward and reverse splits (even or uneven) and dividend payments (cash and stock). However, some corporate actions require adjustments that are unique to each situation, not standardized. These would include mergers, acquisitions, takeovers, spinoffs, or any of these where options contracts are traded on the issuer's securities.
Which of the following can encourage economic growth because gradually increasing prices tend to stimulate business investment?
Mild inflation Inflation is a general increase in prices. Mild inflation encourages economic growth because gradually increasing prices stimulate business investment. High inflation reduces a dollar's buying power, which hurts the economy.
Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?
Municipal revenue bonds Municipal revenue bonds are issued to finance any municipal facility that charges user fees. These municipal bonds are self-supporting because principal and interest payments are made exclusively from revenues generated by the project for which the debt was issued, such as a water and sewer facility billing the municipalities' customers for usage each month.
Which of the following statements about rights and warrants is true?
Rights are short term; warrants are long term. A security with a termination, maturity, or expiration date that is one year or less from the date of issue is said to be short term. Rights offerings have a lifetime of four to six weeks, which makes them short term. If the end date is more than a year from the issue date, the security is long term. Warrants have expiration dates typically two to five years from the date of issue, which makes them long term.
Regular way settlement for Treasury bonds is
T+1 All U.S. government issues settle next business day (T+1).
An investor has received insider information from a research scientist that a chemical company has just invented a new polymer that could be very useful in making strong, light girders in building construction. The investor buys several thousand shares of the company's stock through his registered representative. Several months later, when the patent comes out, the investor sells the stock for a substantial capital gain. Which of the following is least likely to be found liable under the Insider Trading Act?
The CEO of the chemical firm In this scenario, the tipper was the research scientist and the tippee was the investor. They certainly may be held liable. The registered representative (and his firm) may be held liable if it can be shown they had knowledge that insider information was being used. As offered in this question scenario, there is no reason given to think the CEO of the chemical firm was involved.
Who must reconfirm a good 'til canceled order for it to stay in force more than six months?
The customer who placed the order Good 'til canceled orders historically have been canceled at the end of April and October. Some firms will cancel them more frequently, but for the order to stay in effect longer than six months, the customer would need to reinstate the order.
Which of the following would not be expected to be found in a tombstone advertisement for a new issue?
The intended purpose for which to use the sales proceeds While the intended purpose for which to use the sales proceeds would be expected to be found in a prospectus, it would not be found in a tombstone advertisement permitted to offer only bare bones facts about the new issue.
A corporate stock is purchased on Friday, April 2, regular way. When will the trade settle?
Tuesday, April 6 For corporate securities, regular way settlement is the trade date (Friday, April 2) plus two business days; therefore, the trade will settle on Tuesday, April 6.
When an employee is either terminated from, or willfully leaves, a member firm, Form U-5 must be filed. Under these circumstances, which of the following is true?
Under either circumstance, the employing firm is responsible for filing Form U-5. Whenever a registered employee leaves a member firm under any circumstance, it is the employing member firm that is responsible for filing Form U-5.
A REIT can avoid being taxed as a corporation would by
Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders.
Of the following strategies, which is considered most risky in a strong bull market?
Writing calls Short (writing) calls are bearish and have an unlimited maximum loss potential. In wanting the stock to go down, one's risk is that the underlying stock goes up and, in theory, could go as high as infinity.
Who benefits most from a defined contribution plan?
Younger employees Younger employees have more time for the money to grow.
The violation of selling mutual fund shares just below the point where the customer would qualify for lower sales charges and not informing the customer that they may qualify for lower sales charges is
a breakpoint sale. The is the definition of break point sale, and it is a violation of sales practices. The others are forms of market manipulation.
An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be
a face-amount certificate company. A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future.
A person who is vested with legal rights and powers to be exercised for the benefit of another is known as
a fiduciary. A fiduciary is expected to place the interest of the beneficial owner first and is morally and legally responsible for acting in that capacity.
An investor owns MMS call options. This investor is
bullish, hoping the stock will rise. Call owners have the right to purchase the stock. Being in a position to buy (own) the stock makes them bullish. Bulls want stocks to go up. Put owners have the right to sell the stock. Being in a position to sell the stock makes them bearish. Bears want the stock to go down.
Systematic risk would include all of the following except
business risk. Nonsystematic risks are those associated with the issuer (like a bad business strategy). Systematic risks impact large portions of the market and are difficult to reduce by diversification.
Interest-rate risk
cannot be reduced by diversification. Interest-rate risk is one of the systematic risks that cannot be reduced by diversification. It is the risk that fluctuating interest rates will impact bond prices. Primarily, when interest rates are rising, bond prices will be pushed lower.
A person may not act as a registered representative or principal unless Financial Industry Regulatory Authority (FINRA)'s eligibility standards regarding training, experience, and competence are met. In all of the following instances, a person may be statutorily disqualified from FINRA membership except
conviction of a DUI resulting in a fine and probation. Disciplinary sanctions by the SEC, an self-regulatory organization (SRO), a foreign financial regulator, or the foreign equivalent of an SRO may be cause for statutory disqualification of FINRA membership. This would also be the case for willful misstatements made in an application for membership or a felony conviction, either domestic or foreign, or a misdemeanor conviction involving securities or money (not a DUI) within the past 10 years.
An investor owns 3% preferred stock participating to 6%. This means the investor
could receive an additional 3% over the stated 3% dividend if the board declares it. If a preferred stock is described as 3% preferred participating to 6%, the company pays its holders up to 3% in additional dividends in profitable years if the board of directors declares it.
A minimum four-year record retention is required for
customer complaints. Copies of customer complaints require a minimum retention of four years.
Reporting requirements for representatives and principals who are to be registered with Financial Industry Regulatory Authority (FINRA) include filling out a Form U-4 when the individual is hired. All of the following are required to make the registration effective except
disclosure of convictions of a spouse employed by a financial institution. To register an associated person of a member firm with FINRA, the member fills out and submits Form U-4. Information required on Form U-4 is extensive and includes name, address, any aliases, 5-year residency history, 10-year employment history, and information on any charges, arrests, or convictions relating to the investment business for that individual (not spouses). Finally, registration cannot be effective until the person passes the appropriate qualification exam(s).
A convertible feature for preferred shares allows the owner to exchange the shares
for a fixed number of shares of the issuing corporation's common stock. The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.
If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is
greater than 6.10. For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call (YTC), YTM, current yield, and nominal yield.
A mutual fund's share class determines
how sales charges and related expenses are paid. Individual mutual funds are often available to investors as Class A, Class B, or Class C, and there are other classes varying from fund to fund. The share class determines when and how the sales charge is paid. Class A shares have it paid when the shares are purchased, Class B shares have it paid when the shares are redeemed, and Class C shares have a small charge removed from the investor's account every quarter.
Rising employment due to an increase in demand for goods and services would be associated with periods of
inflation. During inflationary periods, prices are rising due to 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 and claims for unemployment benefits will rise.
Section 529 plans are considered municipal fund securities. They must therefore be sold by
offering circular. Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular.
A stock currently has a market value of $75 per share. If a put option on the stock has an exercise price of $60, the put option is
out of the money. This put option has a zero intrinsic value and is therefore out of the money by the 15 points difference by which the market price exceeds the strike price. A put option has intrinsic value or is in the money when the current market price of the underlying asset is less than the exercise price (in this example, $60).
A mutual fund can offer all of the following to investors except
physical custody of the fund's portfolio cash and securities. The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and a number of other services and privileges. However the Act of 1940 requires that each investment company place portfolio cash and securities with a custodian for safekeeping.
Regarding registered representatives working from their residence, commonly known as their home office, all of the following would be true except
prospects would not be allowed to visit and be on the premises at this location. Registered representatives are allowed to operate out of a home or residence, advertising the address and contact numbers. All normal business activities, including taking customer orders for the purchase and sale of securities, would be permitted. Additionally, it would be subject to a premise visit and review by principals of the firm and FINRA examiners as often as needed.
A customer investing in common equity securities could realize all of the following except
protection of principal investment. While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it.
Call risk is most closely associated with
reinvestment risk. Call risk is the risk that a bond might be called before maturity. Often when this occurs, investors who receive their principal back sooner than anticipated are left to find ways to reinvest that will achieve the same returns—reinvestment risk.
Purchased 15 years ago with a coupon of 6.25%, a corporate bond in an investor's portfolio has matured. With interest rates now substantially lower at 2.75%, this investor, having no immediate need for the proceeds, is now exposed to
reinvestment risk. The inability to invest proceeds from an investment that had been earning a higher rate of return, at the now current lower rate, is known as reinvestment risk.
All of the following statements about securities purchases are true except
securities may not be purchased with borrowed money. Borrowing is a perfectly acceptable practice when buying and selling securities, whether it is cash that is borrowed for purchases or securities that are borrowed, chiefly from other investors who have signed a loan consent agreement, allowing their securities to be borrowed for short sales.
For tax purposes, investment income is
taxed at either ordinary income tax or capital gains tax rates. Investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities. For tax purposes, investment income will generally be taxed at one of two rates: ordinary income tax rate or capital gains tax rate.